Dubai Islamic Bank provides an Ijara MBT financing to Al Hilal Construction to lease special equipment for a period of 4 years. DIB purchases the special equipment from Japan on January 1, 2015, for $12,000,000.00 (twelve million) and incurred a transportation cost of $500,000.00 (five hundred thousand). There is also a legal cost of $100,000.00 (one hundred thousand) which the bank considered to be material.

Installments should be paid every quarter. The rental payment was agreed at $400,000.00 (four hundred thousand) per month. The fair value of the equipment after 4 years is estimated at $500,000.00 (five hundred thousand). In the second and third years, the company repair costs are $80,000.00 (eighty thousand only) and $40,000.00 (forty thousand only). A maintenance cost of $50,000.00 (fifty thousand only) due to wear and tear is incurred in Year 3. At the end of the Ijara contract, the asset is transferred to Al Hilal at fair value.

Required:

1. Prepare the journal entries to record the Ijara MBT contract in Dubai Islamic Bank's book for all the contract years. 

2. Prepare the income statement of DIB showing the four years’ net income or losses.

Answer rating: 100% (QA)

Q1 Journal Entry in the Books of DIB Date Particulars Debit Amount Credit Amount 01Jan... View the full answer