KL Islamic Bank entered a two-year Istisna' contract toconstruct a power generator for a total price of $600.00 commencing1 January 2007. The following costs were estimated at the time ofconcluding the contract.
31December 2007 31December 2008 Total
Materials 120,000 60,000 180,000
Wages 180,000 120,000 300,000
Total 300,000 180,000 480,000
Billings were made in year for 2008 for $225,000 and theremaining balance was billed at the end of year 2008.
Following is the payment schedule that was agreed with theclient of KL Islamic Bank:
Year % of total price
2007 25%
2008 30%
2009 45%
There was a substantial increase in material cost in 2008 due tothe liquidation of a major supplier for the said material.Accordingly, the bank revised its cost estimate for material to be$60,000 higher than previously planned.
The bank recognizes revenue based on the percentage ofcompletion method.
Required:
a. prepare all necessary journal entries for the year2007 to 2009 to record the above transactions in the books of KLIslamic Bank.
b. prepare the Statement of Financial Position (extract)and Income Statements (extract) for the year 2007 and 2008 topresent tne transactions relating to the contract.
