WELCOME

TO MY BLOG READERS, WELCOME TO MY BLOG

This site is solely dedicated to publish my writing, mostly on the topic of Islamic finance. Some of the articles were written as partial fulfillment for completing the Chartered Islamic Finance Professional (CIFP) certifications and for the Ph.D in Islamic Finance that I am currently undertake. Interested parties, including reporter/press or students, may reproduce or quote materials published provided that the credit has to be given to my blog (arzim.blogspot.com). Comments must be accompanied by names or pseudonyms. Anonymous postings and those containing profanities and obscenities will be rejected.


Wednesday, January 6, 2010

Accounting For Islamic Financial Transactions - Exercises











PART A
An Islamic bank bought goods for $100,000 and it entered into a Mudharabah contract with a client in which the goods were the mudharib capital. At the time of the contract, the goods had fair value of $110,000. The mudharib (client) sold the goods for $120,000.
  1. During the same year, the mudharib bought another consignment of goods at $120,000 and sold it for $130,000.
  2. Profit is allocated between the Islamic bank and the mudharib at the ratio of 70% to 30% respectively.

Required
Determine the profit of the Islamic bank if the mudharabah goods are valued at:
  1. Historical cost
  2. Fair value





PART B
An Islamic bank paid $100,000 for a two-year Mudharabah contract. Profit is shared in the ratio of 2:1 between the Islamic bank and the mudharib, respectively.
Assume that the Mudharabah:
Realised a profit of $9,000 in the first period.
Incurred a loss of $21,000 in the second period.





Required




Show how the profit to be allocated between the Islamic bank and the Mudharib will appear in their respective financial statements at the end of the first and second period if the profit of the Mudharabah is determined at the end of:
  1. Each period.
  2. The contract.

ANSWER
PART A
  1. Historical Cost
For the 1st transaction, the overall profit would be = $120,000 - $100,000 = $20,000.
The 2nd transaction, the profit would be = $130,000 - $120,000 = $10,000.
Overall profit = $20,000 + $10,000 = $30,000.
Thus, the bank’s share would be = 70% x $30,000 = $21,000.

  1. Fair Value
For the 1st transaction, the overall profit would be = $120,000 - $110,000 = $10,000.
The 2nd transaction, the profit would be = $130,000 - $120,000 = $10,000.
Overall profit = $10,000 + $10,000 = $20,000.
Thus, the bank’s share would be = 70% x $20,000 = $14,000.

PART B
  1. Each period
First Period: Realised profit of $9,000
Bank        = 2/3 x $9,000 = $6,000
Mudharib = 1/3 x $9,000 = $3,000

Second Period: Loss of $21,000
Bank        = Absorb all losses ($21,000)
Mudharib = 0

  1. The contract
Profit of $9,000 in the first year and loss of ($21,000) in the second year. Thus, the overall net loss for the whole 2 year tenure contract is ($12,000).
Bank        = Absorb all losses ($12,000)
Mudharib = 0






1 comment:

  1. it's good to see this information in your post, i was looking the same but there was not any proper resource, thanx now i have the link which i was looking for my research.

    Accounting Dissertation Proposal

    ReplyDelete