Answered: (A)Explain how the conventional…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Bank Shari’ah Malaysia Berhad has entered into an Ijarah contract with Ummah Sdn. Bhd. to lease an equipment for a period of 5 years. Bank Shari’ah purchased an equipment from a foreign trader on the 1st ofJanuary 2000 for $180,000 and incurred custom duty of $20,000. The Bank also incurred legal fee of $5,000 relating to the Ijarah contract, which the bank considered to be material.

Both parties have agreed that the installments should be paid every quarter. The rental payment was agreed $5,000 per month. The netrealizable value of the equipment is expected to be $20,000 at the end of the useful life of the asset.In year 1, Ummah Sdn. Bhd. has found technical default in the equipmentand incurred $10,000 to repair the equipment necessary to retain its fullworking order. Every year, Ummah Sd. Bhd. incurred routine maintenance costs due to wear and tear amounting to $500 per year.

(A)Explain how the conventional accounting concept of Substance over Form influenced the asset recognition policy on Ijarah financing.

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