EXERCISE QUESTIONS

Question 6.1:

(a) Company A entered into a mudharabah contract with Bank Shariah in which the company provides monetary capital of RM2,000,000 to be managed and invested by the Bank. The Bank provides Mudharabah Al-Muqayadah investment account facility whereby the Bank will invest in a specific project as agreed by the client. For this project there is another investor, Company B who had agreed to invest RM1,500,000. The profit and loss sharing between three of them is in the ratio of 4 : 2 : 1 for Company A, Company B and the Bank respectively. The Bank then entered into another mudharabah contract (Re-Mudharabah) with Company X to undertake a housing development project and the had agreed on the profit sharing ratio of 80 : 20 (Bank: Company X). You are required to determine the profit or loss to be shared at the end of the contract by the four parties involved above if:

Profit RM600,000; or Loss RM400,000. Assume; Year 1 2 Profit/ (Loss) (RM) 600,000 (400,000)

Answer: First mudharabah contract (between Company A, B and bank): Rabbul Mal (Investor) Mudharib (Manager) A Capital (RM) Agreed ratio 2,000,000 4 B 1,500,000 2 Bank 0 1

Second mudharabah contract (between Bank and company X):

Rabbul Mal (Investor) Bank Capital (RM) Agreed ratio 3,500,000 80

Mudharib (Manager) X 0 20

Each period method: Year 1 2 Total profit / (Loss) 600,000 (400,000) Bank (Rabbul Mal) (80%) 480,000 (400,000) 80, 000 Company X (Mudharib) (20%) 120,000 0 120, 000

Total 200, 000

Year 1: Bank = 480, 000 x 1/7 = 68, 571

Company A = 480, 000 x 4/7 = 274,286

Company B = 480, 000 x 2/7 = 137, 143

Year 2: Bank = 0 Company A = (400, 000) x 4/6 = (266, 667) Company B = (400, 000) x 2/6 = (133, 333)

Total Bank = 68, 571 Company A = 7, 619 Company B = 3,810 Company X = 120, 000 End of Contract Method:

End of Year 2:

Company X = 200,000 x 0.2 = 40,000 Bank = 200, 000 x 0.8 x (1 /7) = 22, 857 Company A = 200,000 x 0.8 x (4 / 7) = 91, 429 Company B = 200,000 x 0.8 x (2 / 7) = 45, 714

(b) Why do you think mudharabah is arguably one of the most equitable mode of financing? Bank Shariah had agreed to contribute RM5,000,000 as monetary capital based on a five-year mudharabah financing contract (Mudharabah Muqayaddah) at the profit sharing ratio of 3:1 between the Bank (Rab al-Mal) and Ummah Corporation (Mudharib) respectively. Assume the following results of the venture:

Prepare the necessary journal entries to recognize asset and profit/loss of the above transactions, and show how profit/loss will be allocated between the Bank, and the mudharib will appear in the respective income statements from the first to fifth year, if the profit of mudharabah is determined at the end of:

Year 1

Profit / (Loss) (500,000) (400,000) 350,000 500,000 620,000

2 3 4 5 Each period The contract

Answer:

First mudharabah contract (between Company A, B and bank): Rabbul Mal (Investor) Mudharib (Manager) Ummah Corporation 0 1

Bank Shariah
Capital (RM) Agreed ratio 5,000,000 3

Each period method: Year 1 Total profit / (Loss) (500,000) (400,000) 350, 000 500, 000 620, 000 570, 000 Bank (Rabbul Mal) (75%) (500, 000) (400, 000) 262, 500 375, 000 465, 000 202, 500 Company X (Mudharib) (25%) 0 0 87, 500 125, 000 155, 000 367, 500

2 3 4 5
Total

Total Bank Syariah = 202, 500 Ummah Corporation = 367, 500

End of Contract Method:

End of Year 5:

Bank Syariah = 570, 000x 0.75 = 427, 500 Ummah Corporation= 570, 000 x .25= 142, 500