ENDOF-SEMESTER EXAMINATION

IN SEMESTER 1, 2011/2012 SESSION

KULLI YYAH OF ECONOMI CS AND MANAGEMENT SCI ENCES


Programme : B.ACC Level of study : 4

Time : 2.30 pm 5.30 pm Date : 10/1/2012

Duration : 3 hours

Course Code : ACC 4561 Section(s) : 1 - 3

Course Title : Accounting for Islamic Banks



(This Question Paper Consists of 7 Printed Pages With 5 Questions)

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO


INSTRUCTION(S) TO CANDIDATES

1. Answer ALL Questions
2. All answers MUST be written in INK


ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS OFFENCE WHICH
MAY LEAD TO DISMISSAL


APPROVED BY:


Set 1
2
Question 1
AAAOIFIs Financial Accounting Standards 11 (FAS 11) focuses on the profit
equalization reserve and investment risk reserve. This is in line with the prudence
concept. However, these reserves are not free from controversy.
Required:
(i) Define profit equalization reserve and investment risk reserve as per AAOIFIs
FAS 11.
[4 marks]
(ii) What are the issues arising from the application of profit equalization reserve and
investment risk reserve?
[6 marks]
[Total: 10 marks]













Set 1
3
Question 2
Asian Islamic Bank entered a three-year Istisnaa contract to construct a bungalow for a
total price of RM1,200,000 commencing 1 J anuary 2008. The following costs were
estimated at the time of concluding the contract.

31 December
2008
31 December
2009
31 December
2010
Total
Materials 120,000 180,000 50,000 350,000
Wages 180,000 120,000 50,000 350,000
Total 300,000 300,000 100,000 700,000


Billings were made in year 2008 for RM600,000 RM300,000 in year 2009 and the
remaining balance was billed at the end of year 2010.
Following is the payment schedule that was agreed with the client of KL Islamic Bank:
Year % of total price
2008 10%
2009 10%
2010 20%
2011 30%
2012 30%

There was a substantial increase in material cost in 2010 due to the liquidation of a major
supplier for the said material. Accordingly, the bank revised its cost estimate for material
to increase by 10% higher from overall original cost. In order to anticipate the increase in
cost, the customer and the bank has agreed to incorporate the increase in the selling price
by the same amount.
The bank recognizes profit based on the percentage of completion method.



Set 1
4
Required:
i. Prepare ledger accounts in the books of KL Islamic Bank for all relevant
transactions for the accounting periods ending
31
st
December 2008
31
st
December 2009
31
st
December 2010
31
st
December 2011 and
31
st
December 2012

(16 marks)

ii. Prepare the Statements of Financial Position (extract) and Income Statements
(extract) for the year 2008 to 2010 to present the transactions relating to the
contract.
(14 marks)
[Total: 30 marks]













Set 1
5
Question 3
The Statement of Financial Position for KL Islamic Bank Berhad at 31st December 2010
is given below
. Statement of Financial Position as at 31
st
. December 2010.
Assets (RM)
000
Cash and balances with banks and agents 350,000
Deposits and placements with financial
institutions
1,700,000
Dealing securities 1,100,000
Investment securities 300,000
Statutory deposits with Bank Negara Malaysia 250,000
Financing of customers 4,700,000
Bills receivable 300,000
Fixed Assets 500,000
Total Assets 9,200,000
Liabilities
Deposit from customers 7,300,000
Deposits and placements of banks and other
financial institutions
60,000
Bills payable
100,000

Shareholders Funds
Share capital 600,000
Reserves 1,140,000
9,200,000

Additional information are as follows:
i. It is found that 25% of the bills receivable is non-recoverable and need to be
written off. This provision has not been provided in the above statement of
financial position.
ii. A total of RM150,000 value of investment securities has been treated as a long
term investment where the bank has no intention to liquidate.
Set 1
6
iii. Dealing securities include quoted securities of RM 100,000 and unquoted
securities of RM 1,000,000. The market value of quoted securities as at 31
st

December 2010 was RM 180,000.
iv. An amount of RM50,0000 of banks bills payable are non-tradable.
v. Included in the owners equity is an amount owed to charity amounting to RM
35,000.
Required:
i. You are to calculate the amount of zakat payable by the bank for financial year
2010 using the two methods recommended by AAOIFIs FAS 9.
(15 marks)
ii. According to AAOIFIs FAS 9, assets subjected to Zakat need to be valued at
cash equivalent value. Why is this necessary? Identify two (2) most important
zakatable assets of Islamic banks that should be valued at cash equivalent value.
(5 marks)
[Total: 20 marks]
Question 4

For the accounting year ending 31
st
December 2010, Bank Islam Berhad earns a gross
profit of RM 2,500,000 from its Mudaraba investments. Its overhead expenses during
that year were RM 550,000. Additionally, its income from other sources of investment
amounted to RM 300,000. The profit sharing ratio between Mudaraba deposit account
holders and the bank is 6:4 respectively. The following details the deposit types, average
balance, and the weights used for Mudaraba deposit account of the bank in 2010.


Deposit Types Average Balance
in Year 2008
Weights
6 months & less 20,000,000 0.50
9 months & less 30,000,000 0.75
12 months & less 45,000,000 1.0
More than 12 months 55,000,000 1.25
150,000,000








Set 1
7
Required:

i. Distinguish the difference between the pooling and separate investment
account method of profit distribution.
(4 marks)

ii. Given the above, which method of profit distribution policy would Bank Islam
adopt?
(2 marks)

iii. Using your answer to (ii) above, calculate the
a. weighted average balance for each deposit type;
b. depositors share of profit based on the weighted average balance; and,
c. depositors rate of return for each deposit type
d. Ahmad is an investor who has invested RM 450,000 from 1
st
March 2010
to 15
th
September 2010. Calculate the profit due to him.
(14 marks)

[Total: 20 marks]


Question 5

Reza Islamic Bank, an Islamic bank operating in Iran, bought heavy machinery on 10th
December 2007 for RM 160,000 paying for it in cash. Legal cost, which the bank
regarded as material, amounted to RM 9,000.

On 1
st
J anuary 2008, the machine was leased to a housing developer, Mehmet Enterprise
for 3 years ending on 31
st
December 2010. The fair value of the machinery on 1
st
J anuary
2008 was RM 160,000 and the fair value of the machinery on 31
st
December 2010 was
RM 25,000. The estimated residual value of the machine at the end of its useful life was
RM 10,000. Mehmet Enterprise paid the lease payments of RM 36,000 every 6 months.
The first payment was made on 1
st
J anuary 2008.

Total expenditure on maintenance and repairs incurred by Reza Islamic Bank in the
second year of the Ijarah totaled RM 25000. The bank agreed that major repairs
undertaken by the lessee will be reimbursed. In the third year, the lessee paid RM 18000
for such repairs. In addition to this, the lessee also paid routine maintenance expenses
amounting to RM 2000 each year.

Mehmet Enterprise was given the option to purchase the machinery for RM5,000 at the
end of the lease and the company took up the option.




Set 1
8
Required:

i. J ournal entries to record the relevant transactions of Reza Islamic Bank in the
accounting period ending 31st December 2007.
(3 marks)
ii. J ournal entries to record the above Ijarah contract in the books of Reza Islamic
Bank assuming the lease was treated as an Ijarah Muntahia Biltamleek for the three
accounting periods ending 31
st
December 2008, 2009 and 2010.
(10 marks)

iii. The extracts of the income statement for the years ending 31st December 2008,
2009 and 2010.
(4 marks)

iv. The extracts of the balance sheet as at 31st December 2008, 2009 and 2010.
(3 marks)


[Total: 20 marks]