PES UNIVERSITY

I SEMESTER BCOM

FINANCIAL ACCOUNTING 1
UM20BC107

UNIT II

ROYALTY ACCOUNTS

Introduction

Royalty is an amount payable for utilising the benefits of certain rights vested with
some other person. Some people possess certain special right over certain things.

For example a landlord possesses right over the mine in his land. The author of a
book possesses right over his book. The owner of these rights can use the rights
themselves or lease it to others. When the rights are leased the owner receives a
consideration for the same which in called royalty.

Types of Royalty

Technical Terms

 Royalty

Royalty is a periodical sum based on output or sale payable by the lessee to the
lessor for having utilized rights of the lessor.

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The person who makes the payment to the owner of the asset is known as lessee
and the owner of the asset to whom the payment is made is known as lessor.

 Minimum rent

Royalty agreements are usually associated with a clause that the lessee must pay a
minimum amount irrespective of the volume of output or sales in a particular
period. Such minimum amount is known as minimum rent or dead rent or fixed
rent.

Minimum rent becomes payable only when the Royalty is less than the minimum
rent. When the actual royalty is more than the minimum rent then, the minimum
rent will be merged with the actual royalty.

 Short workings

The excess of minimum rent over actual royalty is called short working.

This excess is called short working for the lessee and called short working
suspense for the lessor.

Short working is treated as an asset by the lessee.

Short working suspense is treated as a liability by the lessor.

 Recoupment of short workings

Recoupment of short working refers to recovering the short working of any year,
from the surplus royalty of the succeeding years.

The recoupment may be permitted over a stipulated period of time or over a

specified period following the year of short working or within the life time of the
lease.

Types of Recoupment

1. Fixed Recoupment :

When recoupment is permitted only over a fixed or stipulated period it is called

‘Fixed Recoupment’, or ‘Fixed Recovery’.

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 2. Floating Recoupment:

When recoupment is permitted over a subsequent period following the year of

short working, it is called ‘Subsequent recoupment’ or ‘Floating recoupment’ or
‘Floating Recovery’.

If the short working cannot be recouped within the permitted period, they become
irrecoverable and would be transferred to profit and loss accounts.

3. Life time Recoupment

Under Life time Recoupment, no fixed period of time bound provided to recover
the short working and recoupment shall be made till the last date of royalty
agreement.

For example, if there is short working during 2014 of Rs. 10,000, it shall be
recovered till the lapse of royalty agreement made for 25 years.

Accounting Treatment:

Accounting Entries in the Books of Lessee

The accounting treatment in the books of lessee can be followed using any one
of the methods:

• When Minimum Rent Account is not required or not opened

(Without Minimum Rent Account.)

• When Minimum Rent Account is required or opened

(With Minimum Rent Account.)

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Accounting Entries in the Books of Lessee

(When Minimum Rent Account is opened)

When the Royalty is Less than Minimum Rent and the Minimum Rent
Account is Maintained:

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When Royalties are More than Minimum Rent:

When Short Working cannot be Recouped in Future

Profit and Loss account Dr.

To Shortworkings Account

(Being transfer to irrecoverable shortworking to profit and loss a/c)

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Format of Analytical Table

Calculation of Analysis Table

Fixed Recoupment

1. Prepare an Analysis Table from the following details:

Royalty payable= 50ps. per ton of output
Minimum Rent Rs. 7,500 p.a.
Right of recoupment of short workings = up to 3 years
Output during first 3 years = 10,000, 14,000, 18,000 tons respectively.

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 2. Prepare an Analysis Table of royalties from the following details
Minimum rent Rs. 10,000 p.a
Royalty Re. 1 per ton of ore raised
Shortworkings are recovered during the first 3 years of the lease only.
The output for the first 4 years was:

Years 1990 1991 1992 1993

Output(tons) 2,000 5,000 15,000 20,000

With Minimum Rent and Fixed Recoupment

3. Gokul Mines Company took a lease from a landlord for aperiod of 10 years
from 1st January, 1990 on a royalty of Rs. 5 per ton of coal raised with a
dead rent of Rs. 20,000 and power to recoup shortworking during the first
four years of the lease.

The annual out put was as follows:

Year Output(tons)

1990 2000

1991 3000

1992 4000

1993 4500

1994 5000

Prepare

a) Dead Rent Account

b) Royalties Account

c) Shortworking Account

d) Land lord account in the books of Gokul Mines Company.

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 4. Ramesh wrote a book on Financial Accounting and got it published with
Himalaya Publishing House on the terms that royalties will be paid at Rs.5
per copy sold, subject to a minimum rent of Rs.15.000 per annum, with a
right of recoupment of short workings over the first four years of the royalty
agreement

The details are as under:

Year No of copies No of copies in

printed closing stock

1996. 1,500. 100

1997 2,000. 200

1998 3,000. 300

1999 4,000. 400

2000. 5,000. 500

Prepare Minimum Rent Account, Royalties Account, Short Workings Account

and Ramesh's Account in the books of Himalaya Publishing House.

When short working is recovered with floating recoupment

5. On 1st January 2003 Karnataka collieries leased out some land for a
minimum rent of Rs. 3,000 for the 1st year, Rs. 5,000 in the 2nd year and
thereafter Rs. 10,000 p.a. merged into a royalty of Re. 0.50 per ton with
power to recoup shortworking over two years after occurring the
shortworking.
The annual output for the 5 years ending are:

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YEAR PRODUCTION
(TONS)

2003 3,000

2004 8,600

2005 22,000

2006 28,000

2007 30,000

Prepare the ledger accounts in the books of Karnataka Collieries under minimum
rent method.

6. Sunil took lease of an oil-well from Ajay Oil Ltd. on 1-1-2000. The
minimum rent was Rs.2,00,000 and royalty was Rs20 per ton of crude oil
raised. The shortworkings were recoverable in the succeeding two years of
such short workings, but on the on the condition that if during the next year
of any short workings, the lessee is unable to recover the same (either fully
or partly), he will lose the right to recover 50% of such uncovered amount of
short workings. The output during the first 4 years respectively were 5,500;
8,000, 11,250; 12,500 tons. Prepare Minimum Rent A/c, Royalty A/c,
Shortworkings A/c and Ajay Oil Lid.'s A/c in the books of Sunil.

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When production is affected by strike and when the actual royalty earned
discharges all rental obligation

7. Bengal coal limited leased a colliery from Shankar at a royalty of Rs/ 1.50
per ton of coal raised with a minimum rent of Rs.10,000 per annum. Each
year’s excess of minimum rent over actual royalties is recoverable out of
royalties of next five years. In the event of strike the minimum rent not being
reached, the lease provided that the actual royalties earned for year
discharged all the rental obligation for the year.

The output of the colliery for the first seven years was as follows:

YEAR PRODUCTION (TONS)

2003 NIL
2004 3,000
2005 4,000
2006 6,000
2007 8,000
2008 4,000(strike for 3 months)

2009 10,000

Write up Minimum Rent account, Royalties account, Short workings accounts and
Shankar’s account in the books of Bengal Coal Limited.

8. The Bombay Colliery Co. are lessees of a mine at a dead rent of Rs. 2,0000
p.a, merging into royalty of 50 paise per ton. Dead rent paid in excess of
actual royalties, is recoverable during the next five years succeeding the year
in respect of which such excess was paid. In the event of a strike, if the
actual royalty was less than the dead rent, it was to discharge all rental
obligations. The first year in respect of which the dead rent was payable,
expired on the 31st December 1990. The excess paid in respect of the first

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 year was Rs.2,000; of the second year Rs.1,450; and of the third year
Rs.350.The fourth year the actual royalties amounted to Rs. 2,750 in the
fifth year to Rs. 3,250 in the sixth year to Rs. 3,600 and in the seventh year
(in consequence of strike) to Rs. 1,850 only. Pass the Journal Entries in the
books of Bombay Collie Co. and prepare ledger accounts with Minimum
Rent A/c.

9. Amar Traders obtained a lease of a coal mine on Ist April 1999 on the
following terms:

(a) Royalty Re.1 per tonne.

(b) Minimum Rent Rs.12,000 per annum.

(c.)Recoupment of short workings of each year during the next 3 years subject to a
maximum of Rs.2,500 per annum.

(d) In the event of strike, the minimum rent would be taken pro-rata on the basis of
actual working days, but in the event of lockout, the lessee would enjoy a
concession in respect of minimum rent for 50% of the period of lockout..

(e) Working for the first 5 years is as follows:

Year Actual Royalty

1999-2000 7.000

2000-2001 10,200

2001-2002 19,000

2002-2003 10,800 (strike 73 days)

2003-2004 9.000 (Lockout 4 months)

Prepare Minimum Rent Account, Royalty Account, Shortworking account and

Landlord Account in the books of Amar Traders.

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When short working is recovered within the life time of the lease

10.Mysore Mining Company took a mine on lease for a period of 20 years, at a

royalty of Re. 1 per ton. The minimum rent was fixed at Rs. 4,000 for the
first year, Rs. 6,000 for the second year and Rs. 8,000 per year thereafter.
Short working of any year could be recouped within the life time of the
lease.

The production for the first five years was as follows:

YEAR 1 2 3 4 5

PRODUCTION 2,000 4,500 6,000 9,000 12,000

(IN TONS)

Prepare minimum rent account, Royalty account, Shortworkings account and

Landlord account in the books of Mysore Mining Company.

11. Jain Coal Company is engaged in working a coal mine on 1-1-2000. It

entered into an agreement with the owner of the land which provide for
Royalty of Rs. 10 per ton of coal raised.
Minimum rent of Rs. 12,500 per annum with a power to recoupment till the
end of the lease.
The output for the first five years was:
Years 2000 2001 2002 2003 2004
Production 1000 1125 2500 1500 1900
(Tons)

During 2003, there was a stoppage in production due to Machine Breakdown for
29 days, and it is agreed to reduce minimum rent proportionately to those days.
Prepare table of Analysis.

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SUB- LEASE

INTRODUCTION:

The terms of the original lease may empower the lessee to sub- let a part or whole
of the property to another person(i.e., sub-lease), such arrangement is called sub-
lease.

In such a case, the position of the original lessee will be two fold- as lessee paying
royalties to the landlord and as lessor receiving royalties from the sub-lessee.

As lessee he maintains

 Royalty payable account,

 Short workings account and
 Landlord account.

As sub-lessor he maintains

 Royalty Receivable account,

 Short working Suspense account and
 Sub-lessor account.

A point of significance in case of sub-lease is that the landlord is entitled to get

royalties on total production or sales of both the lessee and sub-lessee.

12.Mr. Manoj has a patent of manufacturing and selling of Tobacco Pipe. He

gave this patent to Sham Sunder for 4 years from 1-1-1998. Minimum rent is
Rs. 40,000 p.a., Royalty is Re. 1 per pipe line sold. Shortworking can be
recouped out of excess royalty in any year. Sham Sunder gave its sub-
licence to sundar Lal and Company for manufacture and sale from 1-1-1999
for 3 years. Rate of Royalty is Rs. 1.25 per pipe sold and minimum rent is
Rs. 10,000 a year. Sundar Lal Company can write-off shortworking in the
first 3 years from the date of taking sub-lease.

year 1998 1999 2000 2001

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 sham sundar 24,000 29,000 46,000 22,000

sundar lal co. - 9,600 11,600 16,000

Prepare the following accounts in the books of shyam Sundar.

1. Royalty payable Account
2. Short workings Account
3. Royalty Receivable Account
4. Manoj’s Account
5. Sunder Lal Company Account

13.On 1.1.1993 Basu obtained a mining lease from Murthy and from that date,
he sub-leased a part of the mine to Ganesh.

Year Output raised(Tons)

Lease. Sub-lease

1993 2,000. 2,000

1994. 6,000. 4,000

1995. 24,000. 10,000

1996. 18,000. 4,000(due to

strike)

1997. 10,000. 24,000

Royalty per ton. Rs. 2. Rs.3

Dead Rent p.a. Rs. 30,000. Rs. 20,000

Short working

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 recoverable in next 3years 2years

In case of strike, royalty earned will discharge all liabilities for the year only.

Prepare:

a)Royalty Payable Account

b)Shortworking Account

c) Royalty Receivable Account

d) Shortworking Suspense Account

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