Recoupment of Short-workings
The right of Recoupment means the right given to the lessee by the lessor to carry-forward and set-off the short-workings from the surplus of royalties over the Minimum Rent. It can be of two types:
Fixed Right of Recoupment: When the lessor allows the lessee to adjust the short-workings only for a fixed period of time, it is known as Fixed Right of Recoupment.
The owners or the management may desire to ascertain the trading results of each department and the overall result of the organization. The method of accounting which is followed to obtain such results is known as departmental accounting.
Recoupment of Short-workings
The right of Recoupment means the right given to the lessee by the lessor to carry-forward and set-off the short-workings from the surplus of royalties over the Minimum Rent. It can be of two types:
Fixed Right of Recoupment: When the lessor allows the lessee to adjust the short-workings only for a fixed period of time, it is known as Fixed Right of Recoupment.
The owners or the management may desire to ascertain the trading results of each department and the overall result of the organization. The method of accounting which is followed to obtain such results is known as departmental accounting.
Unit II Tax Planning and Company PromotionDayanand Huded
The chapter comprises of Meaning of Tax Planning, Tax Avoidance, Tax Evasion and Tax Management; Features and Scope for Tax Planning; Business Location and Tax Planning; Nature of Business and Tax Planning: FTZ, Units in SEZ, 100% EOU and Infrastructure Development.
Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one's tax burden.
Tax Planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions, rebates and reliefs, so as to minimise its tax liability.
(i) Reduction of tax liability: One of the supreme objectives of tax planning is the reduction of the tax liability of the payer and the resultant saving of the earnings for a better enjoyment of the fruits of hard labour.
(ii) Minimization of litigation and the tax payer may be saved from the hardships and inconveniences caused by unnecessary litigations.
(iii) Productive investment: Tax planning is a measure of awareness of the taxpayer to the intricacies of the taxation laws and it is the economic consciousness of the income earner to find out the ways and means of productive investment of the earnings which would go a long way to minimize its tax burden.
(iv) Healthy growth of economy: The saving of earnings is the only basement upon which the economic structure of human life is founded.
(v) Economic stability: Productive investment increase contours of the national economy embracing in itself the economic prosperity of not only the tax payers but also of those who earn the income not chargeable to tax. The planning thus creates economic stability of the nation and its people by even distribution of economic resources.
(i) Residential status and citizenship of the assessee: We know that a non-resident in India is not liable to pay income-tax on incomes which accrue or arise and are also received outside India, whereas a resident in India is liable to pay income-tax on such incomes.
(ii) Heads of income/assets to be included in computing net wealth: Before the Tax-planner goes in for his task; he has to have a full picture of the sources of Income of the tax payer and the members of his family
Introduction to Royalty, Basics and Accounting Entriessatishnn
The owner of an asset (e.g. mines, quarries, patent, copyright, etc), as a business arrangement, may allow other party (lessee, licencee, publisher, etc) the right to use that asset against some consideration. Such consideration is calculated with reference to the quantity produced or sold. This payment to the owner by the user of the asset is termed as Royalty.Minimum Rent / Dead Rent, Short workings/Redeemable Dead Rent, Excess working, Ground Rent/Surface Rent, Recoupment of Short workings,Fixed right & Fluctuating right, Strike and Lockout,
Accounting Entries in the Books of the Lessee/Licencee/Publisher etc.
Where a minimum rent exists with right to recoup short workings, Where the actual royalty is less than the minimum rent, Where the actual royalty is more than the minimum rent, Accounting Entries in the Books of the Landlord / Lessor Where a minimum rent exists with right to recoup short workings Where the actual royalty is less than the minimum rent, Where the actual royalty is more than the minimum rent, Test yourself.
Meaning of agricultural Income, Examples, Non Agricultural Income , Is Agricultural Income taxable? Case study, Examples of Agricultural Income and Non-Agricultural Income
Introduction and Accounting for Buy-back of Shares in India as per the Companies Act 2013 and other rules.
It will be useful for the students of B. Com., B.Com.(H), CA, CS and other professional courses, studying Corporate Accounting.
Unit II Tax Planning and Company PromotionDayanand Huded
The chapter comprises of Meaning of Tax Planning, Tax Avoidance, Tax Evasion and Tax Management; Features and Scope for Tax Planning; Business Location and Tax Planning; Nature of Business and Tax Planning: FTZ, Units in SEZ, 100% EOU and Infrastructure Development.
Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one's tax burden.
Tax Planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions, rebates and reliefs, so as to minimise its tax liability.
(i) Reduction of tax liability: One of the supreme objectives of tax planning is the reduction of the tax liability of the payer and the resultant saving of the earnings for a better enjoyment of the fruits of hard labour.
(ii) Minimization of litigation and the tax payer may be saved from the hardships and inconveniences caused by unnecessary litigations.
(iii) Productive investment: Tax planning is a measure of awareness of the taxpayer to the intricacies of the taxation laws and it is the economic consciousness of the income earner to find out the ways and means of productive investment of the earnings which would go a long way to minimize its tax burden.
(iv) Healthy growth of economy: The saving of earnings is the only basement upon which the economic structure of human life is founded.
(v) Economic stability: Productive investment increase contours of the national economy embracing in itself the economic prosperity of not only the tax payers but also of those who earn the income not chargeable to tax. The planning thus creates economic stability of the nation and its people by even distribution of economic resources.
(i) Residential status and citizenship of the assessee: We know that a non-resident in India is not liable to pay income-tax on incomes which accrue or arise and are also received outside India, whereas a resident in India is liable to pay income-tax on such incomes.
(ii) Heads of income/assets to be included in computing net wealth: Before the Tax-planner goes in for his task; he has to have a full picture of the sources of Income of the tax payer and the members of his family
Introduction to Royalty, Basics and Accounting Entriessatishnn
The owner of an asset (e.g. mines, quarries, patent, copyright, etc), as a business arrangement, may allow other party (lessee, licencee, publisher, etc) the right to use that asset against some consideration. Such consideration is calculated with reference to the quantity produced or sold. This payment to the owner by the user of the asset is termed as Royalty.Minimum Rent / Dead Rent, Short workings/Redeemable Dead Rent, Excess working, Ground Rent/Surface Rent, Recoupment of Short workings,Fixed right & Fluctuating right, Strike and Lockout,
Accounting Entries in the Books of the Lessee/Licencee/Publisher etc.
Where a minimum rent exists with right to recoup short workings, Where the actual royalty is less than the minimum rent, Where the actual royalty is more than the minimum rent, Accounting Entries in the Books of the Landlord / Lessor Where a minimum rent exists with right to recoup short workings Where the actual royalty is less than the minimum rent, Where the actual royalty is more than the minimum rent, Test yourself.
Meaning of agricultural Income, Examples, Non Agricultural Income , Is Agricultural Income taxable? Case study, Examples of Agricultural Income and Non-Agricultural Income
Introduction and Accounting for Buy-back of Shares in India as per the Companies Act 2013 and other rules.
It will be useful for the students of B. Com., B.Com.(H), CA, CS and other professional courses, studying Corporate Accounting.
Accounting for Leases
Unit-III
Leasing Environment:
A lease is a contractual agreement between a lessor and a lessee. This arrangement gives the lessee the right to use specific property, owned by the lessor, for a specified period of time. Lessee makes the payment to the lessor in return over the lease term for the use of the property.
The largest group of leased equipment involves Information technology, Transportation (trucks, motor cars), Construction and Agriculture.
Who are the Lessors? The lessors that own this property generally fall into one of following three categories:
1. Banks.
2. Captive leasing companies.
3. Independents.
Advantages of Leasing:
1. 100% financing at Fixed Rates: Leases are often signed without initial amount from the lessee. In addition, lease payments often remain fixed which protects the lessee against inflation and increases in the cost of money.
2. Protection against Obsolescence: Leasing equipmentreduces risk of obsolescence to the lessee, and in many cases passes the risk of residual value to the lessor.
3. Flexibility: Lease agreements may contain less restrictive provisions than other debt agreements. For example, the duration of the lease may be anything from short period of time to the entire expected economic life of the asset. The payment of rent in most cases is set to enable the lessor to recover the cost of the asset plus a fair return over the life of the lease.
4. Less Costly Financing: Some companies find leasing cheaper than other forms of financing. This may reduce the tax burden of the companies. Through leasing, the leasing companies or financial institutions use these tax benefits. They can pass some of these tax benefits back to the user of the asset in the form of lower rental payments.
5. Tax Advantages: For financial reporting purposes companies do not report an asset or a liability for the lease arrangement. For tax purposes, however, companies can capitalize and depreciate the leased assets.
6. Off-Balance-Sheet Financing: Some leases do not add debt on a balance sheet or affect financial ratios. But they may be added to borrowing capacity.
Accounting by the Lessee: Lessee capitalizes a lease; it records an asset and a liability generally equal to the present value of the rental payments. Lessor having transferred substantially all the benefits and risks of ownership recognizes a sale by removing the asset from the balance sheet and replacing it with a receivable.
Capitalization Criteria (Lessee): In order to record a lease as a capital lease, the lease must be non cancelable. In addition, it must meet one or more of the following four criteria.
1. Transfers ownership to the lessee.
2. Contains a bargain purchase option.
3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executor costs) equals .
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No doubt that, rented premises leads to saving of hefty investment cost but that is only one side of the coin and the other side of coin calls for attention towards the legal aspects involved in such decision which are specified through a Commercial Lease Deed.
A brief introduction on International Accounting Standard (IAS - 17) named as Leasing, within the introduction disclosure requirements are described.
The second part covers the application of IAS - 17 on Financial Statements of Kohinoor Company Ltd.
1
R1
20
V1
1Vac
0Vdc R2
100
V
C1
3m
ECE2280 Homework #1
1. (a) Find 𝑉!/𝑉!
(b) Find the Thevenin equivalent between terminals a-b.
Assume that Vg is the input signal. Find the Thevenin equivalent between terminals a-b.
2. Use the solution from Problem 1.
(a)If Vg=2V DC, what is the output at Vo?
(b)If Vg=5V DC, what is the output at Vo?
(c)If Vg=sin(10t), what is the output at Vo? Make a rough sketch of Vo and Vg.
(d) Note that this is an amplifier – the output is linearly related to the input by a gain value. Mathematically, this is
expressed as:
𝑉𝑜𝑢𝑡
𝑉𝑖𝑛
= (𝑔𝑎𝑖𝑛)
For this circuit, what variable is Vout and Vin. What is the numerical gain value?
3. Sketch the following waveforms. Identify the dc component of the waveform and the ac component of the
waveform.
a. Vs=10cos(2πt)
b. Vs=3V+3cos(3t)
c. Vs=5V±0.5V
4. Explain in your own words the procedural steps for plotting Bode Plots. (Note: I would prepare this question for use
during an exam)
Use the following figure for Problems 5-10:
5. Derive the transfer function 𝐻 𝑠 =
!!
!!
by hand.
6 and 7. Use Multisim to draw the circuit and print it out.
8. Simulate the circuit in Mulitsim to obtain the Bode Plots for the circuit.
9. Use MATLAB and the result of the hand derivation to obtain the Bode Plots.
10. Sketch the straight-line approximation of the magnitude Bode plot on the same graph as that printed out in Problem 9.
Note that Multisim plots the results over frequency and the derived transfer function uses 𝜔.
+ _
10Ω
8v1
+
_
a
b
2v2
40Ω
+
v1
-
5Ω 40Ω
20Ω
6Ω
10Ω _
v2
+
Sales and Disposal of Assets
After reviewing the scenario, explain the impact that the adjusted basis has on the calculation of tax liability, and propose at least two (2) tax-planning strategies for reducing, eliminating, or deferring the payment of capital gains taxes. Also, discuss other alternatives aimed at optimizing deductions or reducing taxes, such as selling the property to an unrelated third party which, in turn, allows losses to be deductible expenses.
Imagine that you are a tax consultant and a client needs your advice on how to reduce his tax liability on the sale of depreciable assets that have not been fully depreciated. The client has identified three (3) long-term depreciable assets and assumes that he will be able to pay capital gains taxes on the profit from their sale. It would be to your client’s advantage to treat a taxable gain as long-term capital gain to which lower rates apply and a loss is categorized as an ordinary loss, which can offset ordinary loss, which can offset ordinary income. Discuss the treatment of gains and losses for Section 1231 and Section 1245 of the Internal Revenue Code, and recommend at least three (3) tax-planning strategies that would assist the client in reducing his tax liability. Provide support for you
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Royalty accounts
1. 1
Royalty Accounts
Some business which the owner has a right or monopoly towards some goods or
services can allow other firms to exercise the right. The owner will get a gratuity
based on how far the rights have been exercised.
In other words, it is a transaction whereby an owner gives a right to other company
or user to use his/her own properties, and in return, the user will then give a
compensation or payment which is known as royalty.
According to MASB (Malaysian Accounting Standard Board), royalty is the
remuneration payable to a person in respect of the use of long term assets such as
patent, trademarks, copyrights and computer software.
The main forms of royalty
a) Mining royalty – to extract mineral and ore from earth
b) The bookpublisher gives gratuity to the author / writer
c) Forthe use of a design
2. 2
Royalty Agreement
A royalty agreement will normally contain clauses dealing with the following:
a) Minimum rent – guaranteed amount which the landlord, inventor or author is to
receive whatever the output maybe.
b) Royalty per unit per output
c) Right to recoup short-workings
d) Right to subject part or whole of tenancy agreement
Minimum Royalty and Short Workings
The payment of royalty is based onthe unit of outputproduced. However, if the sum
of royalty is less than the minimum rent (if any), then the payment will be based on
the minimum rent (minimum royalty – minimum rent).
The difference between the royalty and the minimum rent is known as ‘Short
Working’. Normally, the tenant may obtain the right to recover the short-workings.
Example 1: Royalty without any minimum rent
A landlord granted a lease to mining company whereby he is to receive RM0.05 per
ton of ore mined.
The output for the first 3 years is:
1st year 10,000 tons
2nd year 20,000 tons
3rd year 24,000 tons
3. 3
Solution:
The landlord will receive the royalty of:
1st year RM 500 (10,000 x RM0.05)
2nd year RM1,000 (20,000 x RM0.05)
3rd year RM1,200 (24,000 x RM0.05)
RM2,700
Example 2 : With a minimum rent – also with the rights to recoup short-workings
A landlord granted a lease to mining company whereby he is to receive RM0.05 per
ton of ore mined.
The output for the first 3 years is:
1st year 10,000 tons
2nd year 20,000 tons
3rd year 24,000 tons
Assume that the minimum rent is RM800.
Solution:
Year
Calculation of
Royalty
Minimum
rent
Payment
Short workings
Current Written
off
Recoverable
1
10,000xRM0.05
= RM500
800 800 300 - -
2
20,000xRM0.05
= RM1,000
800 800 - - 200
3
24,000xRM0.05
= RM1,200
800 1,100 - - 100
4. 4
Minimum Rent:
Usually, the royalty agreements contain a clause forthe payment ofa fixed minimum
amount to the lessor every year as royalty—irrespective of the actual benefit to be
taken by the lessee—simply in order to assure the lessor of a certain regular income
from his property.
This minimum amount is known as “Minimum Rent, ‘Dead Rent’, etc. It is to be
remembered that the Minimum Rent may or may not vary in different years. The
Minimum Rent or actual royalty, whichever is higher, is to be paid to the lessor. For
example, X leased a mine from Y at a Minimum Rent of Rs. 12,000 p.a. merging a
royalty of Rs. 2 per ton of coal raised.
Now, if the quantity raised for the 1st year amounted to 4,000 tons and that of 2nd
year 8,000 tons, in that case, X will have to pay Rs. 12,000 for the 1st year to Y, i.e.,
the Minimum Rent [since actual royalty (8,000 = 4,000 × 2) is less than Minimum
Rent]. On the contrary, he will have to pay Rs. 16,000 to Y for the 2nd year [since
actual royalty (16,000 = 8,000 × 2) is more than the Minimum Rent.].
Short-working:
The excess of Minimum Rent over actual royalty is known as short-working.
Therefore, question of short-working will only arise when the actual royalty is less
than the Minimum Rent. Short-workings which are recoupable will appear in the
assets side of the Balance Sheet as a current asset.
In the above example, short-working for the 1st year will be Rs. 4,000 [i.e., Rs.
12,000 – Rs. 8,000 (4,000 × Rs. 2)], since actual royalty is less than the Minimum
Rent. But, in the 2nd year, there will be no such short-working since actual royalty
is more than the Minimum Rent.
5. 5
Recoupment of Short-working:
Usually, in a royalty agreement, a further provision is included about the recoupment
of short-working, i.e., the lessor allows the lessee the right to carry forward and set
off the short-working against the excess or surplus of royalties over the Minimum
Rent in the subsequent years.
In other words, the lessor promises to adjust or return the excess which was charged
in the first few years out of excess earned in the later or subsequentyears. This right
is known as the right of recoupment of short-working.
It can be presented in the following manner:
(a) Fixed;
(b) Floating.
(a) Fixed:
If the lessor or landlord agrees to compensate the losses which were incurred in the
first few years (say, three orfour years) the same is known as fixed, i.e., if any short-
working falls beyond this period, the same cannot be reimbursed.
(b) Floating:
If the lessor or landlord agrees to compensate the loss which were incurred in the
first few years, in the next or following or subsequent three or four years, the same
is known as floating as the same can be adjusted in any year if short-working arises,
i.e., each year’s short-working will have to be adjusted against the excess royalties
earned in the subsequent years accordingly.
Students must remember in this respect that the short-workings which are not
recovered within the stipulated period should be treated as irrecoverable, and, hence,
should be transferred to Profit and Loss Account of the year in which the same is
lapsed. The recoupable part of short-working is shown in the asset side of the
Balance Sheet. Provision to be made for Short-workings
6. 6
It has already been stated above that recoupable short-working appears in the assets
side of the Balance Sheet as a current asset on the assumption that the same will be
recouped in future. But it is uncertain. Sometimes, it may not be possible for the
lessee to recoup the amount of short-working due to many factors although he has
got the legal right to recoup.
From the standpoint of conservatism a provision should be made for such short-
workings against Profit and Loss Account in that particular year when such short-
working appears. It is needless to say that provisions for short-working will appear
in the liabilities side of the Balance Sheet.
Whereas short-workings (recoupable) will appear in the assets side of the Balance
Sheet. Consequently, un-recoupable part of the short-workings will be adjusted
against such provision and not against Profit and Loss Account. The balance of
provision, if any, should be credited to Profit and Loss Account.
Short-working and Minimum Rent—their relationship:
It has already been explained earlier that when the actual royalty (calculated on the
basis of a fixed rate to total quality) is less than the amount of the minimum fixed
amount (i.e., Minimum Rent) short-working arises. In short, short-workings arises
only when actual royalty is less than the Minimum Rent i.e.,
Short-working = Minimum Rent – Actual Royalty
or, Minimum Rent = Actual Royalty + Short-working
However, in the case of landlord, the amount of Minimum Rent is equal to Actual
Royalty Receivable plus the short-workings, i.e.,
Minimum Rent— Actual Royalty Receivable + Short-working
It must be remembered that the landlord is entitled to get the Minimum Rent or
Actual Royalties, whichever is higher, (after adjusting the amount of Short-
workings, if any.) Ground Rent — Sometimes the Lessee is to pay an additional
fixed rent in addition to the minimum rent which is known as Ground RentorSurface
Rent.
7. 7
Method of Accounting:
A. Where there is a Clause on Minimum Rent and Recoupment of Short-
working consequently?
Books of Lessee or Tenants or Licence:
Entries
8. 8
Practically, royalties based on output should be debited to Manufacturing or
Production Account whereas royalty based on sales be treated as selling expenses)
should be debited to Trading Account on Profit and Loss Account.
Note:
It’s an advised to prepare the following chart before making actual attempt for
Solution:
To Sum up:
1. The landlord is entitled to have the Minimum Rent or Actual Royalty, whichever
is more (after adjusting the recoupment of short-working, if any).
2. If there is no clause in the Royalty agreement about the Minimum Rent, there will
neither be any short-working nor any recoupment.
3. The short-working which is recouped is to be shown as current asset in the asset
side of the Balance Sheet.
4. The recoupable part of short-working should be transferred to Profit and Loss
Account.
5. Royalty based on output should be debited to Manufacturing Account or
ProductionAccountand royalty based onsales should bedebited to Trading Account
or Profit and Loss Account.
9. 9
A reliable solution: Bengal Coal Ltd. got the lease of a colliery on the basis of 50
paise per ton of coalraised subject to a Minimum Rent of Rs. 20,000 p.a. The tenant
has the right to recoup short-workings during first four years of the lease and not
afterwards. The output in four years was 1st year-18,000 tons. 2nd year—26,000
tons. 3rd year—50,000 tons. 4th year—60,000 tons. 5th year—1, 00,000 tons. You
are required to give the Journal entries and ledger accounts in the books of the
company.
Interpretation:
1st year:
Actual royalty is less than the minimum rent by Rs. 11,000 (i.e., Rs. 20,000 – Rs.
9,000) which should be carried forward up to first four years if not recouped.
2nd year:
Again actual royalty is less than minimum rent by Rs. 7,000 (i.e., Rs. 20,000 – Rs.
13,000) which again carried forward. Thus, total amount of short-working which is
carried forward is Rs. 18,000 (i.e., Rs. 11,000 for first year and Rs. 7,000 for 2nd
year).
3rd year:
Since actual royalty is more than the minimum, rent by Rs. 5,000 (i.e., Rs. 25,000 –
Rs. 20,000) the same should be recouped against the short-working of Rs. 18,000.
Now, balance of short-working comes down to Rs. 13,000 (Rs. 18,000 – Rs. 5,000).
10. 10
4th year:
In this year also, actual royalty is more than the minimum rent by Rs. 10,000 (Rs.
30,000 – Rs. 20,000) which will be recouped against the balance of short-working
of Rs. 13,000. So, un-recoupable part of short-working, i.e.. Rs. 3,000 (Rs. 13,000 –
Rs.10, 000) should be transferred to P&L A/c as maximum period allowed for
recoupment of short-working was first four years.
5th year:
As there was no short-workings landlord will get Rs. $0,000 i.e., actual royalty or
minimum rent whichever is higher.
13. 13
When Minimum Rent Account is opened:
Entries in the books of Lessee/Licence/Users:
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This method is particularly applicable when Actual Royalty is less than Minimum
Rent.
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Illustration 2:
Accounts to be prepared in the books of Lessor:
M owned the patent of a folding chair. On 1st Jan. 2008, he granted N a license for
5 years to manufacture and sell the chair on the following terms:
(a) Royalty of Rs. 10 per chair sold,
(b) Minimum Rent of Rs. 15,000 p.a.
(c) Short-working could be recouped only within two years following the year in
which the short- working occurs, subject to a maximum of Rs. 3,500 p.a., and
(d) If in any year normal sale was not attained due to strike, the Minimum Rent was
to be regarded as having been reduced proportionately, having regard to the length
of the stoppage.
The number of chairs sold during the lease period was:
During 2011, there was a stoppage due to strike lasting 4 months.
You are required to show the entries and the ledger account of:
(i) Royalties Receivable,
(ii) Royalties Suspense, and
(iii) N’s account in the books of M for each of the above years.
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Interpretation:
2008:
Minimum Rent Rs. 15,000 and actual royalties were Rs. 9,000. So there was a short-
working of Rs. 6,000 (which was transferred to Royalty Suspense A/c)
2009:
Again there was a short-working of Rs. 2,000 (Rs. 15,000 – Rs. 13,000). So, total
amount of short-working amounted to Rs. 8,000 (Rs. 6,000 + Rs. 2,000) which was
carried forward.
2010:
This year is very important. In this year, there was an excess of Rs. 5,000 which
could berecouped. But, as per question, maximum amount ofrecoupment should be
Rs. 3,500. Hence, Rs. 2,500 (Rs. 6,000 – Rs. 3,500) should be credited to Profit and
Loss Accountas the lease agreement provided that short-working could be recouped
only within two following years in which the short-working occurred.
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2011:
During strike period minimum rent would bereduced proportionately i.e., Rs. 15,000
x 8/12 = Rs. 10,000 (as 4 months were the stoppage period) so, royalties in excess
of minimum rent could be recouped i.e., Rs. 1,000 (Rs. 11,000 – Rs. 10,000) out of
the short-workings of Rs. 2,000 in 2009. As such balance of un-recoupable part i.e.,
Rs. 1,000 should be credited to P & L A/c.
For further details about strike, please see the subsequent paragraph.
2012:
Again, there was a short-working amounting to Rs. 1,000 which should be credited
to P & L A/c as the contract was made for 5 years i.e., there was no chance for
recoupment.
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B. Where there is no Minimum Rent?
Under the circumstances, there will not be any short-working; as such question of
recoupment of short-working also will not arise at all. Landlord is entitled to get the
actual royalties only.
The entries under this method are:
(1) Where Actual Royalty earned will discharge all rental obligations:
Under the circumstances, during the period of Strike or Lock-out, there will neither
be short-working nor will there be any recoupment. For example, the contract
stipulates that the Minimum Rent is Rs. 12,000 per year. But, during the period of
strike, actual royalty earned Rs. 8,000. Hence, landlord will get only Rs. 8,000. As
such, there will notbe any short-working ofRs. 4,000 (Rs. 12,000 – Rs. 8,000) which
may be considered in other years.
(2) Where Minimum Rent is reduced proportionately:
Under the circumstances, the amount of Minimum rent will be reduced
proportionately having regard to the length of stoppage. Forexample, the Minimum
Rent is. 12,000 per year. Strike period is 3 months, as such, the amount of Minimum
Rent will be Rs. 9,000 (i.e., Rs. 12,000 × 9/12).
As such, if actual royalty earned is less than Rs. 9,000 there will be short-working
and, similarly, if actual royalties are more than Rs. 9,000, the excess portion may be
recouped (of course, if there is any short-working balance).
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Deduction of Income Tax:
We know that as per Income Tax Act, 1961, Income Tax must be deducted at the
prescribed rate by the lessee from the actual payment so made to the landlord and
deposited to the credit of the Central Government within the stipulated time.
Entries in the books of lessee will remain the same, i.e., the tax deducted at
source must not affect the royalty, except the following entries:
1. When payment is made to landlord:
Landlord A/c Dr. ―Minimum Rent
To Bank A/c ―Actual Payment
To Income Tax Payable A/c ―Amount of Income Tax deducted.
The following illustration will help us to understand the principles clearly:
Illustration 03:
Application of Income Tax:
Mr. Raman, a scientist, owned a patent for the manufacture of electric blanket. In
2006 he allowed Hindustan Manufacturing Ltd. the use of the patent on the terms
that he would receive a royalty of Rs. 10 per blanket manufactured subject to a
Minimum Rent ofRs. 12,000 in 2006, Rs. 16,000 in 2007, and thereafter Rs. 30,000
every year. Any short-workings is recoverable out of the royalties of the two years
subsequent to the year in which short-workings may arise.
The actual output is:
2006 —1000; 2007 – 1,200; 2008 — 3,200 and 2009 — 3,200. Income-tax was
deducted at source @ 20% every year before actual payment of royalty.
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You are required to show:
(i) Royalty Account;
(ii) Short-workings Account and
(iii) Mr. Raman Account from 2006 to 2009.