Question 4

Allocated Mark = 10 marks

a.Highlight the differences between Salam and Istisna' contracts by completing the table below.

(2 marks)

Features of Salam contract

Features of Istisna' contract

Product

Advance full payment

Delivery

Price

Pre-determined at agreed rate

Costs

Period

Short-term within trade cycles

Risk exposures

Credit, market, non-delivery risk

b.

Gulf Islamic Bank entered into a two-year Istisna' contract to construct a solar panel power system for a total price of $600,000 commencing 1 January 2020. The following costs were estimated at the time of concluding the contract.

31 December 2020

31 December 2021

Materials

120,000

60,000

Wages

180,000

120,000

Total

300,000

180,000

Billings were made in tear 2020 for $ 225,000 and the remaining balance was billed at the end of year 2021. Following is the payment schedule that was agreed with the client of Gulf Islamic Banks:

Year

% of total price

2020

10%

2021

10%

The Gulf Islamic Bank incurred general and administration expenses total $ 5,000 during 2020. Substantial increase in material cost occurred in 2021 due to the covid-19 pandemic. Accordingly, the bank revised its cost estimate for material to be $60,000 higher than previous planned. The bank recognises revenue based on the percentage of completion method.

Required:

Prepare all necessary journal entries for the years 2020 to 2021 to record the above transactions in the books of Gulf Islamic Bank! (8 marks)

|All rIaHIaPII 'NI JLylcb 'Nl Question 4 Allocated Mark = 10 marks a. Highlight the differences between Salam and lvs'tjvsnvaf contracts by completing the table below. (2 marks) Features of Salam contract Features of instisvnna,' contract Product Advance full payment Delivery Price Predetermined at agreed rate Costs Period Shortterm within trade cycles Risk exposures Credit, market, nondelivery risk b. Gulf Islamic Bank entered into a two-year ism' contract to construct a solar panel power system for a total price of $600,000 commencing 1 January 2020. The following costs were estimated at the time of concluding the contract. 31 December 2020 31 December 2021 Materials 120,000 50,000 Wages 180,000 120,000 Total 300,000 180,000 Billings were made in tear 2020 for S 225,000 and the remaining balance was billed at the end of year 2021. Following is the payment schedule that was agreed with the client of Gulf Islamic Banks: Year % of total price 2020 10% 2021 10% The Gulf Islamic Bank incurred general and administration expenses total 5 5,000 during 2020. Substantial increase in material cost occurred in 2021 due to the covid19 pandemic. Accordingly, the bank revised its cost estimate for material to be $60,000 higher than previous planned. The bank recognises revenue based on the percentage of completion method. Required: Prepare all necessarv iournal entries for the vears 2020 to 2021 to record the above transactions in the ELI