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Mle an, ———— eee, , Rnancial Accounting - | (268) Royalty Accounts \, , CHAPTER - 7, , ROYALTY ACCOUNTS ————————, CHAPTER CONTENTS, Introduction, Minimum Rent, Shortworking, Surplus, Sub-lease, Journal Entries in the books of Lessee, Journal Entries in the books of Landlord, Illustrations, Exercises, , , , Introduction :, , Royalty may be defined as a periodical Payment for the use of certain property or, rights. Royalties may be payable or receivable. It is not the payment for the purchase or, acquisition of an assets. It is to be treated as a revenue nature., , This system is applicable (o the mining companies, manufacturing units, publishing, houses etc. Lesse's payment to landlord or paid to the patentee fur use of patent is, called Royalty payment (o be made by the user of the user of such asset for the use of, other's assets is called as Royalty., , The owner of such asset i.e. Land, mine, fisheries, etc. is called as landlord or the, person holding patent is called as patentee when landlord, Patentee or Author permits, another person {o use the land, patents licence or book is called lessee, licence publisher, respectively., , Some Important Terms :, 1) Minimum Rent :, , Immediate use of the property may not be possible (o lessee. He may require some, time. Due to this condition landlord may not receive fixed amount of Royalty. To avoid, this risk landlord puts a condition that he should get minimum amount as Royalty. Such, guaranteed amount payable to landlord is called ‘Minimum Rent! or 'Dead Rent’. The, rule is that for ‘Actual Royalty' or Minimum Rent! which ever is higher isto be paidtoLandiord. +, 2) Short-working : |, , When the amount of Minimunt rent is in excess of actual Royalty if is called 'Shostworking.’ The amount of Short- working may or may not be allowed (o he recovered in, future. When it is allowed (o be recovered then it is carried forward and deducted as per, the agreement of the parly. Terms of Recoupment is as follows. !, , i) First Five Years:, To years including the year of agreement or shor(- working.

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8h, , Bnancial Accounting - |, Royalty Accounts, , (269) :, , ii) Subsequent years :, , Continu, the seas yess afler (he year of agreement or year of Short-working. (Exdude, - ‘Sin which (here is Shor(- workin ), , he following years : 8, , Next year ;, 3) Surpiue or years, excluding the year of Short- working., , ‘Sar ', plus is the excess amount of (he Royalty over (he minimum rent when Short, working is all itt, 7 Shea to be recovered it is (o be deducted from surplus., , calle eee Ge transfer a part of his rights to another person or party is, hetween a tenant and ar person is called the sub-tenant. Sub-lease is a contract, the agreement, The fear tenant. Sub (enant will pay the royalty to the tenant as per, . is the landlord for him., The following Journal entries passed in the books of lessee or tenant., A) If actual Royalty is less than Minimum Rent _, ___ Ghort-working & Minimum Rent A/c opened in the books of lessee.) IMP,, 1) Minimum Rent Payable :, Minimum Rent A/c ., To Landlord A/c.., @eing Minimum Rent Payable), 2) Royalty & Short- working, Royalty A/c..., Short working A/c, To Minimum Rent A/c ., (Being Royalty and shor(- working due), 3) Payment (o the landlord : “, Land Lord Alc..7., To Cash/Bank A/c., (Being payment made (o landlord), , , , . Dr. :, , , , , , , , , , , , , , , , , , , , , , , , , 4) Transfer of Royalty :, Profit and Loss A/C sssssesssees seaneni as pastsavsveersoserenn, To Royalty BIC sessvarsscsecssossseneesssensnssseneeneseneoeeey, (Being Royalty transferred (o P & L A/c), , , , , , , , , , , , , , B) If actual Royalty is more than Minimum Rent. (Surplus) :, 1) Royalty due:, Royalty A/e.. Dy ., To Landlord A/c. f, |__ Being Royalty due), , S|

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aRinancial Accounting - |, , (270), , Royalty Acceunts, , |, , , , 2, , 2), Landlord Payment & Recoupmen( of short- working, 2" andlord's A/C «sve., , , , , To Cash/Bank A/, To Short- working A/c., Geing payment paid (o Landlord), , , , '|3).ccTransfer of Royalty to P/L Alc:, , Profit and Loss A/c.., , To Royalty Alc..., (Being Royalty Transfer to P& L A/o), , , , , , 4) Balance of short-working transfer to P/L A/c:, , , , , , Profit and Loss A/c..., To Short- working A/c., Geing short- working balance transfer to P & L A/c), , =, 7, 3, :, , , , , , “Tay! If'actual Royalty is less than Minimum Rent (Short- workin,, , The following Journal entries passed in the books of Lan, ), , dlord., , , , , , J) Temant Al Co..sssecossensoeeneoee, , ve Dr, , , , , To Minimum Rent A/c., @eing minimum rent due), Tr., , , , 2) Minimum, Rent Alc .., , , , , To Royalty A/c, To Short-working A/c...., (Being Royalty and short working due), , , , 3) Cash/Bank A/C...-ssssssooee, , , , B) If actual Royalty is more than Minimum Rent (Surplus) :, 1) Tenant A/c...... Ik., , , , , To Profit and Loss A/c., , ed to P& LA/c) , , , , , , , , , (Being Royalty transferr, , , , To Royalty A/c.., (Being Royalty due), , , , , , 2) Cash [Bank Al Corrsssecsesees ensvecessee, , , , , , , To Short working A/c., , To Tenant Al Corser 8, (Being cash received from tenant after readjusted}, , seeeeevenscnscesonee, , , , , , 3) Royally Al Cues saesuaen i, , To Profit and Loss A/c..., (Being royally transferred to P & L A/c), , , , , , 4) Short-working Al C....sss, , , , , , , , , , To Profit and Loss A/c, (Being Short-working transfer to P & LA/s)

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Landlord:, , He is the actual owner of the right. The contract between him and the tenant will not, be affected by granting a sub-lease. He will continue to get royalty on the total, production both of tenant and sub-tenant., , Tenant ( Lessee ) :, , On account of granting a sub-lease, he will be working in dual capacity. He is a, tenant as well as a landlord. He is a tenant for the owner while a landlord for the, sub-tenant. He will pay royalty to the owner on total production — his own production, and sub-tenant's production. He will get royalty from the sub-tenant on sub-tenant's, output. As a tenant, he maintains Minimum Rent Payable Account, Royalty Payable, Account, Shortworkings Recoverable Account and Landlord Account. As a landlord,, he maintains Minimum Rent Receivable Account, Royalty Receivable Account,, Shortworkings Allowable Account and Sub-tenant's Account., , Sub tenant ( Sub-lessee ) :, , He will pay royalty to the tenant as per the contract of sub-lease. The tenant is the, landlord for him., , Journal Entries :, , "ten,, , Generally, examination problems require accounting treatment in, ant's" books. This is because, the landlords are individuals who, , generally do not maintain any set of books., , In case, where the landlord maintains books of accounts, the entries, , therein are just reverse of the entries in the books of tenants., , , , , , , , Books of Tenant Books of Landlord, (or Lessee or Licensee or Publisher) ( or Lessor or Patentee or Author ), (A) Where royalty is "less" than | A) Where royalty is "less" than, Minimum Rent . Minimum Rent, 1. Minimum rent payable : 1. Minimum rent receivable :, Minimum Rent A/cDr. Tenant's A/c Dr., To Landlord A/c To Minimum Rent A/c, 2. Royalty and shortworkings : | 2. Royalty and Shortworkings :, Royalty A/c Dr. Minimum Rent A/c Dr., Shortworkings A/c Dr. To Royalty A/c, To Minimum Rent A/c To Shortworkings A/c, 3. Payment to landlord: 3. Receipt from tenant:, Landlord A/c Dr. Cash A/c, To Cash A/c To Tenant's A/c Dr., 4. Transfer of royalty : . | 4. Transfer of royalty:, Profit and Loss A/c Dr. Royalty A/c Dr., To Royalty A/c To Profit and Loss A/c

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Books of Tenant, , (or Lessee or Licensee or Publisher), , Books of Landlord, , ( or Lessor or Patentee or Author ), , , , , , B) Where royalty is "equal" to, or "more" than minimum rent, , 5. Royalty due :, Royalty A/c Dr., To Landlord A/c, 6. Payment to landlord and, , recoupment of shortworkings:, Landlord A/c Dr., To Shortworkings A/c, To Cash A/c, , Note : Recoupment can take place, only in the years in which there is, surplus., , Transfer of royalty :, Profit and Loss A/c, To Royalty A/c, , Shortworkings not recoverable :, Profit and Loss A/c Dr., To Shortworkings A/c, , Dr., , , , (B) Where royalty is "equal" to or, "more" than minimum rent, 5. Royalty receivable :, , Tenant's A/c Dr., To Royalty A/c, 6. Receipt from tenant and, recoupment of shortworkings:, Cash A/c Dr., Shortworkings A/c Dr., To Tenant's A/c, 7. Transfer of royalty :, Royalty A/c Dr., To Profit and Loss A/c, 8. Shortworkings not allowable, , (gain) :, , Shortworkings A/c Dr., , , , To Profit and Loss A/c, , , , , , , , , , Solved Problems, , , , , , Problem 1 [Simple Problem], , Bengal Mining Co. took a coal-field on lease from Bose Brothers from, , ist January, 1983. Royalty was at Rs., , 2 per ton of coal taken out. Minimum, , rent was Rs. 20,000 per year. Shortworkings were to be tecovered within, the first four years of the contract. The coal taken out during the first four, , years was as follows:, , Year Tons, 1984 4,000, 1985 1,000 ., 1986 11,000, 1987 17,000, , Pass Journal Entries in the books of Bengal Mining Co., , Sol. : In solving practical problems,, , table on the following lines :, , it is always advisable to prepare a