Prepare extract journal entries from the beginning until the end of the contract to record the recognition of assets and profit/loss of diminishing musharakah financing provided by Ithmaar Bank.

Accounting for Musharakah

• Ithmaar Bank provides working capital to Hameed construction based on the principle of diminishing musharakah amounting to BD 750,000. The profit and loss sharing ratio (PSR) as agreed by both parties is similar to the capital contribution ratio (CCR) which is 40:60 (bank: customer) at the initiation of the contract.

• The repayment shall be equal during the contract lifespan. However, Hameed construction had financial distress in year 2 and this managed to pay 40% of the agreed repayment amount. Half of the amount outstanding in year 2 has been paid in year 3 and another half was paid in year 4. It's also worth that Hameed construction also faced financial problems in year 4 whereby the repayment outstanding at the end of the year was BD 45,000.

The profit and loss for the project are as follows:

• Year 1 Profit BD 270,000
• Year 2 Loss BD 250,000
• Year 3 Profit BD 325,000
• Year 4 Loss BD 100,000

Answer rating: 100% (QA)

At the initiation of the contract Ithmaar Bank Assets Working Capital Diminishing Musharakah 750000 ... View the full answer