Royalty Accounts. Important Terms

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Marian Wilkinson
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1 Royalty Accounts Important Terms Minimum Rent Minimum Rent is the amount below which landlord never accepts in any year from the person who has to pay royalty in case of mines. Minimum Rent is also known as Fixed Rent, Dead Rent, Flat Rent or Contract Rent. If in any year amount of royalty is less than the amount of minimum rent, the amount of minimum rent is payable by the person who has to pay the royalty, but if the amount of royalty is more than the amount of minimum rent, royalty will be paid. Importance of Minimum Rent Fixation of minimum rent is in the interest of landlord because it guarantees him the receipt of the minimum rent even in the case of low output or sales. In the absence of minimum rent clause, only the actual royalty will be paid to the landlord. Moreover, it also gives incentive to the lessee to enhance production or sales because he is bound to pay minimum rent. Redeemable Minimum Rent Generally, when minimum rent is more than royalty, then minimum rent is payable if no such provision is given in the agreement, but if it is mentioned in the agreement that when royalty will be more than minimum rent, the excess of minimum rent over royalty paid in the earlier years will be written off out of the excess of the royalty over minimum rent in the coming years such minimum rent is called Redeemable Minimum Rent. Shortworkings The excess of minimum rent over royalty is called Shortworkings. Minimum Rent Royalty = Shortworkings or M.R. R = S.W. Recoupment or Writing off Shortworkings Recoupment of short working refers to recovering the short working of any year, from surplus royalty of the succeeding years. the Recoupment may be permitted over a stipulated period of time (fixed Recoupment) or over a specified period following the year of short working (floating Recoupment) or within the life time of the lease(recoupment within life time of the lease). All the conditions regarding recoupment or writing off shortworkings are based on the mutual agreement between the lessee and lessor. Shortworkings may be recouped in all the future years or it may be recouped throughout the period of lease. For example, if It recouped during the first four years Page 1

2 of the lease, then recoupment will take place only during the first four years, and not afterwards, in the fourth year unwritten balance of shortworking will be transferred to the Profit and Loss Account and future year s shortworkings will also be transferred to the Profit and Loss Account of the concerning year. Sl. No. Accounting entries in the books of lessee a) Without minimum rent account is not opened Circumstances Royalties are less than the minimum rent 01 For Royalty payable Royalties a/c Short working a/c To Land lord a/c 02 For payment of royalty Land lord a/c To Bank a/c 03 For transfer of royalty Profit and loss a/c To Royalty a/c Royalties are more than the minimum rent Royalties a/c In case short working is not completely recovered (non-recovery of short working) 04 For transfer of shortworking Profit and loss a/c To Short working a/c To Short working a/c To Land lord a/c b) With minimum rent account is opened Sl. No. Circumstances Royalties are less than the minimum rent 01 For minimum rent payable Minimum rent a/c To land lord a/c 02 For Royalty payable Royalties a/c Short working a/c To minimum rent a/c 03 For payment of royalty Land lord a/c To Bank a/c 04 For transfer of royalty Profit and loss a/c To Royalty a/c Royalties are more than the minimum rent No entry Page 2

3 In case short working is not completely recovered (non-recovery of short working) 05 For transfer of shortworking Profit and loss a/c To Short working a/c Sl. No. Circumstances 01 For Royalty receivable 02 For receipt of royalty 03 For transfer of royalty Accounting entries in the books of lessor Royalties are less than the minimum rent Lessee s a/c To Short working suspense a/c To Royalties receivable a/c Bank a/c To Lessee s a/c Royalty receivable a/c To Profit and loss a/c Royalties are more than the minimum rent Lessee s a/c In case short working is not completely recovered (non-recovery of short working) 04 For transfer of shortworking Short working suspense a/c To Profit and loss a/c Short working suspense a/c To Royalties receivable a/c Page 3

4 Example 1 X Coal Ltd has taken a leas coal field from Y on the following terms: 1) Lease is for 99 years 2) Lease rent is to be 50p per annum for every ton of coal raised 3) Minimum royalty per annum to be Rs. 30,000; the lessee has a right to recoup any shortworkings for a period of 3 years for which excess payment was made. 4) In case the working of mines was affected by any strike or riot and if there was no raising of coal, minimum rent payable would abate proportionately. 5) The following were the raisings for different years: Tons Year Raised (Strike for 3 months where no coal was mined) Prepare royalty, shortworkings and landlord s accounts in the books of X Coal Ltd. Solution 1 Books of Coal Ltd Statement of Royalty Payable Year Royalty Shortworkings Shortworkings Recouped Shortworkings Not Recouped Page 4

5 Royalty Account 1990 To Y By Production A/C To Y By Production A/C To Y By Production A/C To Y By Production A/C To Y By Production A/C To Y By Production A/C Shortworkings Account 1990 To Y By Bal C/D To Bal b/d By Bal C/D To Y To Bal b/d By Bal C/D To Y To Bal b/d By Y (part of shortworkings recovered) 5000 By P&L A/C (shortworkings not recovered in 1990) By Bal C/D To Bal b/d By Y By P&L A/C (shortworkings not recovered in 1991) 2500 By Bal C/D To Bal B/D By Y Page 5

6 Y Account 1990 To Bank By Royalty a/c By Shortworkings A/C To Bank By Royalty a/c By Shortworkings A/C To Bank By Royalty a/c By Shortworkings A/C To Shortworkings A/C By Royalty a/c To Bank To Shortworkings A/C By Royalty a/c To Bank To Shortworkings A/C By Royalty a/c To Bank Example 2 B wrote a book on accountancy and had it published from A on terms that royalties will be 15% on the published price of the copies sold with a minimum of Rs per year. B gave an undertaking to revise the book when requested by the publisher and to pay Rs. 500 to A per month for every month of the delay after six months of the request made by A. In the event of delay, the condition of the minimum amount Rs payable to B was not applicable. This arrangement was to last for 10yrs, in the 1 st instance. The number of copies sold and published is as follows: Date Copies Sold Price Page 6

7 At end of 1997, B was requested to revise the book. The revised manuscript reached A only on 1 st November Pass the journal entries and prepare ledger accounts in the books of A and B. Solution 2 In the Books of A A s Journal Date Particulars Amount Amount 1995 Royalties A/C 6000 Shortworkings A/C 4000 To B (Being on Rs subject to minimum Rs ) 1995 B To Bank (Being payment made to b) 1995 Profit and Loss A/C To Royalties A/C 6000 To Shortworkings A/C 4000 (being transfer of royalties a/c and shortworkings a/c to P&L a/c 1996 Royalties A/C To B (Being on Rs ) 1996 B To Bank (Being payment made to b) 1996 Profit and Loss A/C To Royalties A/C Royalties A/C To B (Being on Rs ) 1997 B To Bank (Being payment made to b) 1997 Profit and Loss A/C To Royalties A/C Royalties A/C 7500 To B Page 7

8 (Being on Rs condition of min amount does not apply as B delayed revision work beyond 6 months) 1998 B 7500 To Damages Recovered a/c 2000 To Bank 5500 (Payment of sum due Rs being compensation for delay by B transferred to Damages Recovered account) 1998 Profit and Loss A/C 7500 To Royalties A/C Damages Recovered a/c 2000 To Profit and Loss A/C Royalties A/C To B (Being on Rs ) 1999 B To Bank (Being payment made to b) 1999 Profit and Loss A/C To Royalties A/C Since the publisher does not have the right to recoup shortworkings, the shortworkings of each year have been transferred to profit and loss account. A s Ledger Royalties Account 1995 To B By P&L A/C To B By P&L A/C To B By P&L A/C To B By P&L A/C To B By P&L A/C Page 8

9 B s Account 1995 To Bank By Royalties A/C 6000 By Shortworkings A/C To Bank By Royalties A/C To Bank By Royalties A/C To Damages Recovered 2000 By Royalties A/C 7500 To Bank To Bank By Royalties A/C Shortworkings A/C 1995 To B By P&L A/C 4000 Damages Recovered A/C 1995 To P&L By B 2000 B s Journal Date Particulars Amount Amount 1995 A To Royalties A/C (Being on Rs subject to minimum Rs ) 1995 Bank A/C To A (Receipt of Sum due) 1995 Royalties A/C To Profit and Loss A/C A To Royalties A/C Page 9

10 (Being on Rs ) 1996 Bank A/C To A (Receipt of Sum due) 1996 Royalties A/C To Profit and Loss A/C A To Royalties A/C (Being on Rs ) 1997 Bank A/C To A (Receipt of Sum due) 1997 Royalties A/C To Profit and Loss A/C A 7500 To Royalties A/C 7500 (Being on Rs ) 1998 Bank A/C 5500 Damages A/C 2000 To A 7500 (Receipt of sum due less Rs due to delay in revising book by 4 months) 1998 Profit and Loss A/C 2000 To Damages A/c 2000 (P&L a/c debited by the damages paid) 1999 A To Royalties A/C (Being on Rs ) 1999 Bank A/C To A (Receipt of Sum due) 1999 Royalties A/C To Profit and Loss A/C Page 10

11 B s Ledger Royalties Account 1995 To P&L A/C By A To P&L A/C By A To P&L A/C By A To P&L A/C By A To P&L A/C By A A s Account Date Particulars Date Particulars Amount 1995 To Royalties A/C By Bank To Royalties A/C By Bank To Royalties A/C By Bank To Royalties A/C 7500 By Bank 5500 By Damages A/C To Royalties A/C By Bank Page 11

UNIT-I FIRE INSURANCE CLAIM LOSS OF STOCK POLICY LOSS OF PROFIT POLICY APPLICATION OF AVERAGE CLAUSE

UNIT-I FIRE INSURANCE CLAIM LOSS OF STOCK POLICY LOSS OF PROFIT POLICY APPLICATION OF AVERAGE CLAUSE INSURANCE CLAIM Every business unit has to keep a sufficient quantity of stock in the business premises