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.