MARGINALIZATION (Different learners in Marginalized Group
ROYALTY
1. ROYALTY
. Concept of Royalty
. Minimumrateand short workings.
. Accountingentriesinthe books of lesser / landlord.
. Accountingentriesinthe books of lessee / tenant.
Thisis theremunerationpayabletoa person in respect of the use of an
asset, calculated with referencetothe qualityproduced/sold asresult of use
of such asset.
The loyalty is a periodic payment tothe owner of an asset for theuse of his
ownership right that isroyalty is a compensationmadetothe owner of an
asset in exchange for the right touse that asset.
Royalty may arisein respect of the following;
a) For the extractionofminerals/ materialsfrom theground.
b) For the publishing and books from the permissionof the author.
c) For the use of the artistic worklikemovies e.t.c
Any lump sum amount paid for the use of any asset in never called royalty
becauseit is capitalpayment.
TERMS USED IN THIS TOPIC:
i) Lesser / Land lord: Thisis owner of the asset, theperson whom the
right touse the land is granted iscalled tenant / lessee.
ii) Short workings: Thisis the differencebetweenroyalty and minimum
rent/excessof minimum rent over royalty.
iii) Minimumrent / dead rent / rock rent / flat rent
Is the guaranteed amountthat islandlord or theowner of the copy right is
to receive.
2. iv) Recoupment of a short working; according totheshort workings
closed or contract, thetenant is empowered to cover the amount paid in
excess of actualroyaltyout of the excessroyalty over minimum rent
(surplus). Until the stageof recovery is reached , he canaccumulatethe
short workingsand when once the stageof surplus is reached, he can go on
recovering the excessof minimum rent, and after full recovery , pay the
actualroyalty. Usually in contractswherethereis provisionof minimum
rent, thereis also a provisionof equipment ofshort workings. Generally,
recoupment isthe right of getting backfrom the land lord excesspayment
madeby the tenant in the earlier years. The right torecoupment short
workingsmay be either; a.1fixed b.1 A floating type.
In caseof a Fixed right or recoupment of short workings, the right is
availableonly for a fixed period of time.
In casethe tenant is not in a positionto recoup the short workingsduring
thisperiod, thebalanceamount will be a loss to him which will be w/o from
the profit and loss (P + L) a/c.
Illustration1
A limited Co. leases a mine at a loyalty of 20/= each pert tone of coal raised
which a dead rent for 400,000 per annum and further to recouped short
workingsduring the first five years of thelease. Output during thefirst five
years is as follows;
YEAR PRODUCTION(TONNES)
1 2500
2 12,000
3 20,000
4 30,000
5 40,000
Required:
Show journalentriesand ledger accountsinthe books of lessor and lessee
Note: All workingsshould be shown
3. ROYALTY TABLE
SHORT WORKING A
YEAR PRODUCTION ROYALTY M/RENT RESULTED RECOUPED W/OFF P
1 2500 50,000 400,000 350,000 - - 4
2 12,000 240,000 400,000 160,000 - - 4
3 20,000 400,000 400,000 - - - 4
4 30,000 600,000 400,000 - 200,000 - 4
5 40,000 800,000 400,000 - 310,000 - 4
The following account madein;
A) When thereis no provisionfor dividend or minimum rent.
i) Royalty based on actualproduction.
DR: Royalty payablea/c
CR: Land lord’s a/c
ii) Cash paid to the land lord.
DR: Land lord a/c
CR: Cash a/c
B) Whenthere is provisionfor minimum rent
i) Royalty based on production
DR: Royalty payablea/c
CR: Land lord a/c
ii) Short workingsto be recovered in Future
DR: Short workingsa/c
4. CR: Landlord a/c
iii) Cash paid to landlord
DR: Landlord a/c
CR: Cash a/c
iv) Short working unrecovered (if any)
DR: Profit & loss a/c (Bad debts)
CR: Short workingsa/c
c) When royaltyexceed minimum rent
i) Royalty based on actualproduction
DR: Royalty payablea/c
CR: landlord a/c
ii) Short working recouped, if any
DR: Landlord a/c
CR: Short working a/c
iii) Cash paid to landlord
DR; Land lord a/c
CR; cash a/c
Note: Cash paid to landlord must not be less thanminimum rent
iv) Short workingsirrecoverable
DR; profit & loss a/c
CR; short working a/c
Workings:
5. DR ROYALTY PAYABLE ACCOUNT CR
DATE DETAILS AMOUNT DATE DETAILS AMOUNT
1ST
YEAR
A.LTD COY 50,000
Manufacturing
a/c
50,000
2ND
YEAR
A.LTD COY 240,000
Manufacturing
a/c
240,000
3RD
YEAR
A.LTD COY 400,000
Manufacturing
a/c
400,000
4TH
YEAR
A.LTD COY 600,000
manufacturing
a/c
600,000
5TH
YEAR
A.LTD COY 800,000
Manufacturing
a/c
800,000
DR A. LTD’s ACCOUNT CR
DATE DETAILS AMOUNT DATE DETAILS AMOUNT
1st year Bank 400,000 1st year
Royalty
payable
50,000
short
workings
350,000
400,000 400,000
2nd year Bank 400,000 2nd year
Royalty
payable
240,000
short
workings
160,000
400,000 400,000
3rd year Bank 400,000 3rd year
Royalty
payable
400,000
4th year Bank 600,000 4th year
Royalty
payable
600,000
6. 5th year Bank 800,000 5th year
Royalty
payable
800,000
DR LAND LORD
ACCOUNT CR
DATE DETAILS AMOUNT DATE DETAILS AMOUNT
2000 Bank 200,000 2000 Royalty payable 100,000
2000 short workings 100,000
200,000 200,000
2001 Bank 200,000 2001 Royalty payable 150,000
short workings 50,000
200,000 short workings 200,000
2002 Bank 200,000 2002 Royalty payable 200,000
2003 Bank 200,000 2003 Royalty payable 225,000
short workings 25,000
225,000 225,000
2004 Bank 200,000 2004 Royalty payable 250,000
short workings 50,000
250,000 250,000
DR ROYALTY RECEIVABLE
CR
DATE DETAILS AMOUNT DATE DETAILS AMOUNT
8. 2004
Royalty
receivable
250,000 2004 Bank 200,000
short
workings
50,000
250,000 250,000
DR ROYALTY SUSPENSE
ACCOUNT CR
DATE DETAILS AMOUNT DATE DETAILS AMOUNT
31.12.2000 Balancec/d 100,000 2000 S.G COY LTD 100,000
31.12.2001 Balancec/d 150,000 2001 Balanceb/d 100,000
2001 S.G COY LTD 50,000
150,000 150,000
31,.12.2002 Balancec/d 150,000 2002 Balanceb/d 150,000
S.G COY LTD 25,000 2003 Balanceb/d 150,000
31,12,2003 Balancec/d 125,000
150,000 150,000
S.G COY LTD 50,000 2004 Balanceb/d 125,000
31.12.2004 Balancec/d 75,000
125,000 125,000
2005 Balanceb/d 75,000
ILLUSTRATION III;Mr. R Company leased a Royalty from Mr. A of 1 E
per tone’s which a minimum rent of 30,000 E.P.A each years of excess of
dead rent over royaltyis recoverableout of the royaltiesof the next five (5)
9. years. In the event of strikeand the minimum rent not being reached. The
lease provided that the actualroyaltyand for the year should be paid, the
result of workings wereas follows;
YEARS PRODUCTION
2001 -
2002 9750
2003 27750
2004 33750
2005 42000
2006 52500
2007 28500
2008 45,000
SUB- LEASE
The lease agreed sometimesgives right tothe lessee to sub contact the
right for the use of asset, this is known as “Sub – lease”.
And the person who is sub – contracted isknown as sub lessee / sub
tenant.
The accounting treatmentfor the sub lease and thelease and the
lessee is similar to that of the land lord and sub lease.
In the caseof sub- lease, the lessee takesthe legal stand of the land
lord to the sub-lessee.
It must be noted that thereis no agreement betweentheoriginal
landlord and the sub- lessee as per the originalagreement terms. But
what eventually is paid to the originalland lord is calculated based on
the totaloutput of the both lessee and sub- lessee.
The lessee is paid based on the output produced or manufactured by
sub – tenant.
In most cases the lessee chargershigher pricetothe sub-lessee than
be is charged tothe originallandlord. Profit of thesuch priceare
transferred tothe P + L A/C
ACCOUNTINGTREATMENTS:
10. i) Royalty payable( own + sub- lessee)
DR: Royalty payablea/c
CR: Land lord’s a/c
ii) Royalty receivablea/c (Based on sub – tenant production)
DR: Sub tenant a/c
CR: Royalty receivablea/c
iii) Short working recoverablein futureby sub – Lessee
DR: Sub – tenants
CR: Short workings
iv) Royalty payableby tenantson sub-tenantsproduction
DR: Royalty Receivablea/c
AC: Royalty payablea/c
v) Profit on sub – lease;
DR; Royalty Receivablea/c
CR: P + L a/c
ILLUSTRATION
Doti limited acquired rightsfrom Noteltd to manufactureand sell a certain
brand of perfume on the following terms;
i) Royalty shall be paid on number of bottlesmanufactured at 20/=per
bottle/per unit.
ii) The minimum royaltyinany one year shall be 500,000/=
iii)Short working willbe recouped withinthefirst two year of short
workings.
11. iv)The agreement tobecomeeffectiveon 1st July 2000.
v) All settlement were madeon 31st December on each year.
On 1st January2000, Doti limited granted righttoMwingineLtd to
manufactureand sell the sameperfumeson the following terms;
a) Royalty shall be paid on number of bottlesmanufactured at 30/=per
bottle/ per unit.
b) The minimum royaltyinany one year shall be 200,000/=
c) Short working recouped only in the year
Following the year of short workings.
The following informationisprovided;
YEARS
DOTI
LTD
MWINGINE
LTD
2000 80,000 -
2001 11,000 6000
2002 14,000 7000
2003 16,000 11,000
2004 12,000 5000
Required;
Show ledger account in the books of Doti LTD.
ROYALTY TABLE (i) ORIGINAL LEASE
YEARS PRODCTN ROYALTY M.RENT SHORTWORKINGS AM
RESULTED RECOUPED W/OFF PAI
2000 8000 160,000 500,000 340,000 - - 500
