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Royalty Accounts

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Suitable for those doing B.Com or BBM. Part of financial accounting unit.
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  Professor Vipin 2014 www.VipinMKS.com Page 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  Professor Vipin 2014 www.VipinMKS.com Page 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.  Accounting entries in the books of lessee a)   Without minimum rent account is not opened Sl. No. Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For Royalty payable Royalties a/c Dr Short working a/c Dr To Land lord a/c Royalties a/c Dr To Short working a/c To Land lord a/c 02 For payment of royalty Land lord a/c Dr To Bank a/c 03 For transfer of royalty Profit and loss a/c Dr To Royalty a/c In case short working is not completely recovered (non-recovery of short working) 04 For transfer of short-working Profit and loss a/c Dr To Short working a/c b)   With minimum rent account is opened Sl. No. Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For minimum rent payable Minimum rent a/c Dr To land lord a/c   No entry 02 For Royalty payable Royalties a/c Dr Short working a/c Dr To minimum rent a/c 03 For payment of royalty Land lord a/c Dr To Bank a/c 04 For transfer of royalty Profit and loss a/c Dr To Royalty a/c  Professor Vipin 2014 www.VipinMKS.com Page 3 In case short working is not completely recovered (non-recovery of short working) 05 For transfer of short-working Profit and loss a/c Dr To Short working a/c  Accounting entries in the books of lessor Sl. No. Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For Royalty receivable Lessee’s a/c Dr To Short working suspense a/c To Royalties receivable a/c Lessee’s a/c Dr Short working suspense a/c Dr To Royalties receivable a/c 02 For receipt of royalty Bank a/c Dr To Lessee’s a/c  03 For transfer of royalty Royalty receivable a/c Dr To Profit and loss a/c In case short working is not completely recovered (non-recovery of short working) 04 For transfer of short-working Short working suspense a/c Dr To Profit and loss a/c  Professor Vipin 2014 www.VipinMKS.com Page 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: Year Tons Raised 1990 20000 1991 35000 1992 30000 (Strike for 3 months where no coal was mined) 1993 70000 1994 80000 1995 100000 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 1990 10000 20000 1991 17500 12500 1992 15000 7500 1993 35000 5000 15000 1994 40000 10000 2500 1995 50000 7500

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