Copyright protected © - AAOIFI

1. Which of the following is true?

a) The credit balance of Hamish Jiddiyyah is presented in the asset side of the
statement of financial position.
b) Istisna’ receivables are presented within the investments.
c) Deferred sales receivables are evaluated at fair value at the statement of
financial position date.
d) In income statement, the deferred sales income includes the effect of deferred
sales funded by unrestricted investment accounts.

Read the following and answer questions 2 and 3.

Ahmad invested USD 200000 in an Islamic bank on 1/10/2008 on the basis of mudaraba
contract in which he allowed to commingle his fund with the bank’s own funds and to
deduct 10% of profit as share of mudarib. The bank used the funds in funding a
murabaha operation done with client Mahmoud on 1/11/2008 with a nominal value of
USD 220000 (on 10 monthly installments). After 5 months of regular payments the
client Mahmoud declared his bankruptcy which forced the bank to seize the asset (subject
of murabaha contract) and sell it via auction at 1/4/2009 with a value of USD180000.

2. What is the accounting entry as at 1/4/2009?

a) Dr. Cash 180000

Dr. Sales receivables – deferred profit 10000
Cr. Sales receivables – Mahmoud 110000
Cr. Payables – Mahmoud 70000
Cr. Income – deferred sales 10000

b) Dr. Cash 180000

Cr. Sales receivables – Mahmoud 110000
Cr. Income – deferred sales 70000

c) Dr. Cash 180000

Cr. Sales receivables – Mahmoud 110000
Cr. Payables – Mahmoud 70000

d) Dr. Cash 180000

Dr. Sales receivables – deferred profit 10000
Cr. Sales receivables – Mahmoud 110000
Cr. Payables – Mahmoud 80000

Copyright protected © - AAOIFI 1

Copyright protected © - AAOIFI

3. What is the effect on the 3 parties?

a b c d
Ahmad 9000 10000 18000 - 20000
Bank 1000 1000 2000 0
Mahmoud - 30000 0 - 40000 0

4. Ahmad invested USD 200000 in an Islamic bank on the basis of unrestricted

mudaraba contract in which the parties will share profits evenly, and the
bank used these amounts in financing two operations. The first is a
mudaraba contract signed with client Mahmoud for a value of USD 60000 in
which they expect to have USD 5000 as profit and to share the profits on the
ratio of 40% for the bank and 60% for Mahmoud. The second operation is
musharaka contract signed with client Isam with a capital of USD 280000
funded equally with a profit distribution ratio 60% for the bank and 40% for
Isam.

If the results are USD1000 profit from mudaraba operation and USD 20000
losses from musharaka operation (with no due negligence), what is the effect
on the involving parties?

a b c d
Ahmad - 5800 - 10200 - 9800 - 20000
Bank -5800 200 200 0
Mahmoud 600 600 600 300
Isam - 8000 - 10000 - 10000 - 8000

5. Upon receiving a binding purchase order to buy a car with market value of
USD 11000, the bank collected from the client USD 1000 as Hamish
Jiddiyyah on 25/10/2008, then signed and executed the related Murabaha
contract at 1/11/2008 with the value of USD 10000 collectable via 10 monthly
installments (and Hamish Jiddiyah was considered as payment for the first
installment). Knowing that the car cost the bank USD 9000 and the client is
paying the installments on regular basis, what is the effect of the operation on
the bank accounts at 31/12/2008?

a b c d
Receivables -Client 8800 8000 8000 8000
Account
Income – deferred sales 2200 1000 200 200
Deferred profit 0 0 800 800
Unrecognized gains 0 1000 0 1000

Copyright protected © - AAOIFI 2

Copyright protected © - AAOIFI

6. Which of the following is false?

I. Debt owed by either the Mudarib or another party to the capital provider
can be used as capital in a Mudaraba contract.
II. In a Murabaha contract, the institution is prohibited from selling any item
before having acquired the item.
III. Tradable bonds can be issued based on the debt from a Salam contract.
IV. An Ijarah contract may be executed for an asset undertaken by the lessor
to be delivered to the lessee according to accurate specifications, even if
the asset so described is not owned by the lessor.
V. In a Mudaraba contract, the capital provider (rab al maal) always permits
the Mudarib to administer a Mudaraba fund without any restrictions.

Answer:
a) I and V
b) II, III and V
c) II, III, and IV
d) I, III and V

7. For the purposes of financial accounting for Islamic Financial Institutions, how
the effect of changes in the purchasing power of money is dealt with?

a) Financial Statements are restated to reflect the changes in the purchasing power or
money.
b) Effect of such changes are accounted for in the Statement of Equity
c) For the purposes of financial accounting, the stability of the purchasing power of
the monetary unit is assumed.
d) Effect of any changes in the purchasing power of money is accounted for in the
income statement.

8. Which of the following is not a qualitative characteristic of accounting

information?
I. Relevance
II. Substance over form
III. Accrual concept
IV. Reliability
V. Comparability

Answer:
a) I and V

Copyright protected © - AAOIFI 3

Copyright protected © - AAOIFI

b) I and II
c) II and III
d) III and IV

9. How will you treat a correction of an error in prior period financial

statements?
I. Correct the error retroactively by restating the financial statements for all
prior periods presented which have been affected by the error.
II. Carry out the adjustments in the financial statements for the year in which
the error was detected.
III. Merely disclosing the error in the financial statements for the year in
which the error was detected.
IV. Adjust the Retained Earnings at the beginning of the first period presented
to reflect the cumulative effect of the correction of the error on the periods
which are not presented but which were affected by the error.

Answer:

a) I
b) II and III
c) IV
d) I and IV

10. XYZ Ltd, the purchase orderer, in a binding promise under a Murabaha
contract with an Islamic Bank agrees to buy goods worth USD 5,500 and pays
USD 500 as Hamish Jiddiyyah. However, XYZ fails to fulfil its promise and, as a
result, the Islamic Bank sells the goods to another client for USD 3,000. The
accounting treatment for this in the Islamic Bank’s books will be (assuming cost
of goods for the bank was USD 5,000.)

a) Consider Hamish Jiddiyyah paid (USD 500) as an obligation and treat it as a

liability unless the Shari’a supervisory board of the Islamic Bank decides
otherwise.
b) To record the losses incurred (USD 2,000) from sale of asset to another client in
the income statement.
c) To deduct the losses incurred (USD 2,000) first from Hamish Jiddiyyah paid and
record the balance (USD 1,500) in income statement.
d) To deduct the amount of actual loss (USD 2,000) from Hamish Jiddiyyah and
record the balance losses (USD 1,500) as an amount due from the original
purchase orderer.

Copyright protected © - AAOIFI 4

Copyright protected © - AAOIFI

11. In Istisna’a contract the price can be:

a) Paid in advance
b) Payable within a stipulated time
c) Payable upon completion
d) Any of the above

12. The rent in a lease contract may be in the form of:

a) Use of asset.
b) A fixed cash amount to be paid at the end of the lease period.
c) An unspecified quantity of a commodity.
d) (a) and (b)

13. It is not permissible for an Islamic Bank to charge its customer a fee for a
Murabaha transaction, except for:
a) Commitment fee, in exchange for the right to contract the Murabaha transaction.
b) Credit facility fee, for the provision of the Murabaha credit facility.
c) Syndicated financing fee, if such syndicated facility is arranged.
d) None of the above

14. The owner of an asset can enter into;

a) A lease contract of immediate effect

b) A lease contract of future effect
c) (a) only.
d) (a) and (b).

15. In cases involving personal guarantee the guarantor may be entitled to;

a) A lump sum fee

b) A certain percentage of the guaranteed amount
c) Reimbursement of expenses
d) A reciprocating service

Copyright protected © - AAOIFI 5

Copyright protected © - AAOIFI

XYZ Bank Statement of Financial Position as at 31/12/2009

(Amounts in USD)
Current Year
Assets
Cash 50,000
Current Deposits 700,000
Net Murabaha Receivables 80,000,000
Deferred Profit from Murahaba Operations (5,000,000)
Parallel Salam 4,750,000
Mudarab Receivables 10,000,000
Other receivables 1,500,000
Net Fixed Assets 2,500,000
Provisions for doubtful "other receivables" (150,000)
Total Assets 94,350,000

Liabilities and Equities

Liabilities
Current Accounts Deposits 6,000,000
Hamish Jiddiyyah 4,000,000
Salam Financing 4,900,000
Suppliers 1,000,000
Long Term Financing 1,500,000
Payables - Profit Distribution for Unrestricted Investment Accounts 2,000,000
Equity of Unrestricted Investment Accounts Holders 52,850,000
General Provisions for Mudaraba Receivables 1,400,000
Total Liabilities 73,650,000

Owner's Equity
Paid Up Capital 10,000,000
Retained Earnings 3,000,000
Investment Risk Reserves 6,000,000
Profit Equalization Reserves 2,000,000
Total Owner's Equity 21,000,000

Total Liabilities and Equities 94,650,000

Based on the above Statement of Financial Position, and from general accounting point of
view, answer questions 16 to 20 (assuming that the trial balance that was used to prepare
this statement of financial position is balanced, that there is no omission of any accounts,
and that there is no mistake in the amounts).

Copyright protected © - AAOIFI 6

Copyright protected © - AAOIFI

16 - What is wrong with the item “Net Murabaha Receivables”?

A - Its amount, in relation to total assets, is too large.
B – “Hamish Jaddiyyah” should be deducted from “Murabaha Receivables” and thus
constitute a part of “Net Murabaha Receivables”.
C - “Deferred Profit from Murabaha Operations” should be included in “Net Murabaha
Receivables” which in turn should become USD75,000,000.
D - All of the above.

17 – The Statement of Financial Position is not balanced due to (assuming that the trial
balance that was used to prepare this statement of financial position is balanced, that
there is no omission of any accounts, and that there is no mistake in the amounts):
A - Calculation error
B – “Provision for doubtful “other receivables”” should be presented under liabilities.
C – “Salam Financing” should be presented under assets and Parallel Salam should be
presented under liabilities.
D - None of the above.

18 – Assuming that the historical cost of the Fixed Assets amounts to USD 4,000,000
while the depreciation expenses were USD 300,000 for 2009, and that the accounting
policies adopted by the bank do not allow revaluation of Fixed Assets, what is the amount
for accumulated depreciation of the Fixed Assets?
A – USD300,000.
B - USD1,500,000.
C – Nil.
D – USD2,500,000.

19 - What is your opinion about “Investment Risk Reserves” and “Profit Equalisation
Reserves”?
A - No opinion, due to the absence of detailed information.
B - No problem with these accounts.
C – “Profit Equalization Reserves” should be reflected in “Equity of Unrestricted
Investment Account” only.
D – “Investment Risk Reserves” should be presented in “Equity of Unrestricted
Investment Account” only.

20 - Which of the following is/are wrongly presented?

I – “Long Term Financing”.
II – “Payables - Profit Distribution for Unrestricted Investment Accounts”.
III – “General Provisions for Mudaraba Receivables”.
A – (II).
B – (III).
C – (II) and (III).
D – (I), (II) and (III).

Copyright protected © - AAOIFI 7