Questions
1. What is Musharakah and what are the conditions of Musharakah?
2. Explain the types of Musharakah Financing.
3. Syamimi wants to open a computer shop in Klang, Selangor. In order to start her
business, she needs a capital of $2,500,000. Syamimi chooses to enter into
Mudarabah agreement with Am Islamic Bank Berhad which agreed to provide the
financing for 5 years. In the agreement, both parties agreed that the profit-sharing
ratio between Syamimi and the bank is 40:60 respectively. Profit and losses for the
first three years of the agreement are as follows:
Year Result of the Business Amount
Year 1 Profit $460,000
Year 2 Loss $370,000
(50% of the loss is due
to Syamimi’s
negligence)
Year 3 Profit $750,000
Syamimi’s business is doing well after 3 years. She then decided to move into the next level
which is to become a partner with Am Islamic Bank. At the end of year 3, they agreed to
convert the Mudarabah to a Musharakah Mutanaqisah with Syamimi placing $650,000 as
capital. The new profit-sharing ratio between Syamimi and the bank is in the ratio of 70:30
respectively.
The profit and loss of the Musharakah Mutanaqisah are as follows:
Year Result of the Business Amount
Year 4 Profit $900,000
(1st year of Musharakah
Mutanaqisah)
Year 5 Loss $300,000
In the beginning of Year 4, Syamimi decided to buy 30% of the bank’s share of capital at
$740,000. Another 30% of the bank’s share of capital was sold to Syamimi in the beginning
of Year 5 at $650,000. In the beginning of Year 6, the bank agreed to sell the remaining of its
capital at $690,000.
The Musharakah Mutanaqisah terminated at Year 6 when the entire bank’s share of capital
was sold to Syamimi.
Required:
a. Show the journal entries for Am Islamic Bank Berhad for Year 1, 2, 3, 4, 5 & 6.
b. Show the capital contribution schedule for Am Islamic Banks Berhad and
Syamimi for Year 4, 5 & 6.
4. Bank Shari’ah Malaysia Berhad has provided capital to a Muslim entrepreneur based
on the principles of musharakah mutanaqisah amounting to RM400,000. The
entrepreneur has also provided capital of RM 400,000. Profit and loss sharing ratio as
agreed by both parties is 40:60 (Bank: Customer) at the beginning of the contract. The
Bank and entrepreneur have also agreed for the profit sharing ratio to change to 30:70
for year 3 and 4. The repayment shall be equal throughout the contract period.
However, the customer (entrepreneur) has financial difficulties during year 2 and thus
only managed to pay installment on the capital for that year amounting to RM 50,000.
The entrepreneur also faced with financial difficulties in year 4 whereby the
repayment outstanding is amounting to RM 20,000 at the end of the contract. The
profit and loss for the above project is as follows:
Year 1 Profit of RM80,000
Year 2 Loss of RM50,000
Year 3 Profit of RM120,000
Year 4 Loss of RM30,000
Required:
Prepare extract of journal entries from the beginning until the end of the contract to
record the recognition of asset and profit/loss of musharakah mutanaqisah financing
provided by Bank Shari’ah Malaysia Berhad based on the following recognition
methods:
i. Cash basis
ii. Accrual basis
Solutions
3. a. The journal entries for Am Islamic Bank Berhad for Year 1, 2, 3, 4, 5 & 6.
Year 1 Dr Mudaraba Financing $2,500,000
Cr Cash $2,5000,000
(Provision of mudaraba financing to mudarib)
Year 1 Dr Cash $276,000
Cr Mudaraba Profit (0.60x$460,000) $276,000
(Profit in 1st year)
Year 2 Dr Mudaraba Loss (0.50x$370,000) $185,000
Cr Mudaraba Financing $185,000
(Loss in 2nd year)
Year 3 Dr Cash $450,000
Cr Mudaraba Profit (0.60x$750,000) $450,000
(Profit in 3rd year)
Year 4 Dr Musharakah Financing $2,315,000
Cr Mudaraba Financing $2,315,000
(Convert Mudaraba Financing to Musharakah Financing)
Year 4 Dr Cash $270,000
Cr Musharakah Profit (0.30x$900,000) $270,000
(Profit in 4th year)
Year 4 Dr Cash $740,000
Cr Musharakah Financing $694,500
Cr Musharaka Profit $ 45,500
(Sale of bank’s share in Musharakah Financing)
Year 5 Dr Musharakah Loss (0.55x$300,000) $165,000
Cr Musharakah Financing $165,000
(Loss in 5th year)
Year 5 Dr Cash $650,000
Cr Musharakah Financing $436,650
Cr Musharakah Profit $213,350
(Sale of bank’s share in Musharakah Financing)
Year 6 Dr Cash $690,000
Dr Musharakah Loss $328,850
Cr Musharakah Financing $1,018,850
(Sale of bank’s share in Musharakah Financing)
b. The capital contribution schedule for Am Islamic Banks Berhad and Syamimi for
Year 4, 5 & 6.
Syamimi Bank
Total remaining capital at 650,000 2,315,000
the beginning of year 4
30% shares of bank 694,500 (694,500)
acquired by Syamimi
0.30x2,315,000
Total remaining capital at 1,344,500 1,620,500
the end of year 4
45% 55%
Loss in 5th year (135,000) (165,000)
45% x 300,000 55%x300,000
1,209,500 1,455,500
30% shares of bank 436,650 (436,620)
acquired by Syamimi
0.30x1,455,500
Total remaining capital at 1,646,150 1,018,850
the end of year 5
61.8% 38.2%
All shares of bank acquired 1,018,850 (1,018,850)
by Syamimi
Total remaining capital at 2,665,000 0
the end of year 6
100% 0%
4. The answer will be:
Year Capital CCR PSR Profit/ P&L P&L
by the Loss (Bank) (Client)
bank
1 400,000 50:50 40:60 80,000 32,000 48,000
2 300,000 37.5:62.5 40:60 (50,000) (18,750) (31,250)
3 200,000 25:75 30:70 120,000 36,000 84,000
4 100,000 12.5:87.5 30:70 (30,000) (3,750) (26,250)
The Journal Entry will be:
Accrual Basis
Year Transections Debit (RM) Credit
(RM)
1 Musharakah Financing 400,000
a/c 400,000
Cash account
(Financing for customers)
Cash account 100,000
Musharakah Financing 100,000
a/c
(Repayment by customer)
Cash account 32,000
Profit & loss account 32,000
(Recognition of profit)
2 Cash account 50,000
Profit & loss account 18,750
Receivable account 31,250
Musharakah financing a/c 100,000
3 Cash account (100,000 + 115,625
15,625(31,250/2))
Musharakah financing a/c 100,000
Receivable account 15,625
Cash account 36,000
Profit & loss account 36,000
4 Profit & loss account 3,750
Receivable account 16,250 (20,000-3,750)
Cash account 80,000
Musharakah financing a/c 100,000
Cash account 15,625
Receivable account 15,625
Cash Basis
Year Transections Debit (RM) Credit (RM)
1 Musharakah Financing 400,000
a/c 400,000
Cash account
(Financing for customers)
Cash account 100,000
Musharakah Financing 100,000
a/c
(Repayment by customer)
Cash account 32,000
Profit & loss account 32,000
(Recognition of profit)
2 Cash account 50,000
Musharakah financing a/c 100,000
3 Cash account (100,000 + 115,625
15,625)
Musharakah financing a/c 115,625
Cash account 36,000
Profit & loss account 36,000
(Recognition of profit)
4 Cash (80,000+15,625) 95,625
Musharakah Mutanaqisah 95,625