On 1st January 2017, Meezan Islamic Bank entered into an Istisna contract with Syeikh Enterprise (SE). The

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Question:

On 1st January 2017, Meezan Islamic Bank entered into an Istisna’ contract with Syeikh Enterprise (SE). The bank is to supply (build) SE a power generator for RM110 million to be completed in three years. The bank will bill SE 20% in the first year, 50% in the second year, and 30% in the third year. All payments by SE will be in the subsequent year following the billing. SE will not bear any increase in costs.

At the same time, the bank entered into a Parallel Istisna’ contract with Turnbull Turbines (TT) to construct the power generator for a sum of RM90 million over 2 years. Payments by the bank to TT were made in the same year as the billings by TT.

TT’s terms of engagement clearly stated that they will not bear any additional cost over-run. The bank agreed to pay ITT a 10% initial payment on the signing of the contract. In the first year, TT billed RM42 million to the bank. In the second year, however, costs escalated and TT informed the bank that it would cost an additional RM35 million to complete the bridge and they would need a 5-month extension. They billed the bank another RM60 million during the second year. In the third year, TT completed the power generator. However, the actual costs had only gone up by RM30 million and TT agreed to pay a penalty of RM15 million according to the Istisna’ contract for late completion. The Shariah Supervisory Board of the bank has established that any late payments by subcontractors should be donated to the charity. TT billed the bank the remaining amount during the third year and was paid accordingly.

Required:

(a) Prepare all necessary journal entries for the year 2017 to 2019 to record the above transactions in the books of Meezan Islamic Bank based on the percentage of completion method.

(b) What is the income earned by Meezan Islamic bank for each of the years? Please show all the workings.