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Tutorial Questions - Royalty Accounting
Tutorial Questions - Royalty Accounting
Mashima corporation Ltd obtained a lease of coal from Mr. Lake on the following terms from
1st January, 2014
(a) Royalty will be Shs 500 per tonne of coal raised during the period.
(b) Minimum rent will be shs 2,500,000 for the first year with a annual increase of shs 250000
till it reaches shs3,750,000
(c) Short workings, if any, are recoverable within first 3 years only.
Year Production
2014 1000
2015 2000
2016 10000
2017 15000
Shows necessary accounts in the books of Mashima Corporation
QUESTION TWO
Mining Corporation Ltd obtained a lease of coal field for 99 years from Mr.Landlord on the following
terms from 1st January,2013
QUESTION THREE
Michael, owned the patent rights for a bottle opener. On I January 2014 he granted to Ram & Co
Ltd a license for seven years to manufacture and sell the bottle opener on the following terms::
(i) Ram & Co Ltd. were to pay Michael a royalty of Tshs 3,000 for every 100 bottle
opener sold with a minimum payment of Ths 3,000,000 per annum. Calculations to be
made annually as on 31 December and payment on 31 January.
(ii) If, for any year, the royalties calculated on bottle opener sold amount to less than
Tshs. 3,000,000 Ram & Co Ltd may set off the deficiency against royalties payable in
excess of that sum in the next two years.
The numbers of bottle openers sold in the first four years were as follows:
Year to 31 December
2014 60,000
2015 80,000
2016 120,000
2017 140,000
You are required to show the accounts relating to the above transactions in the books of Ram &
Co Ltd for the first four years of the agreement.
QUESTION FOUR
Coal Ltd., leased land from Shirima at a royalty of shs shs 500 per ton of coal raised. Minimum
rent was Shs 48,000,000.
Shortworkings to be recouped during first four years. The coal raised in the first four years was
as follows:
Years Tons
2013 80,000
2014 90,000
2015 60,000 (Strike for three months)
2016 120,000
There was a provision of proportionate reduction in minimum rent in case of stoppage of work
by strike, lock out, accident etc.
Required: Prepare relevant ledger account in the books Coal Ltd. Show all your workings by
preparing a statement showing calculation of shortworkings and its recoupment (Royalty
analysis sheet).
QUESTION FIVE
Mr. Paul develop a software package for a turnkey project for Offshore Drilling.
He granted Ms. Angel a licence for 7 years to use the software and sell the
same in Tanzania on the following terms
1) Ms. Angel should pay to Mr. Paul a royalty of shs 5 for each software
package sold with a minimum annual payment of shs 50000. Accounts
should be settled on 31 December.
2) In any year the royalties amounted to less than shs 50000. Ms Angel
should have the right to deduct the deficiencies from the royalities
payable in excess of that sum in the two following years. the number of
package sold were as follows