Professor Vipin 2014
Royalty Accounts
Important Terms
Minimum Rent
Minimum Rent is the amount below which landlord never accepts in any year from the person who has
to pay royalty in case of mines. Minimum Rent is also known as Fixed Rent, Dead Rent, Flat Rent or
Contract Rent. If in any year amount of royalty is less than the amount of minimum rent, the amount of
minimum rent is payable by the person who has to pay the royalty, but if the amount of royalty is more
than the amount of minimum rent, royalty will be paid.
Importance of Minimum Rent
Fixation of minimum rent is in the interest of landlord because it guarantees him the receipt of the
minimum rent even in the case of low output or sales. In the absence of minimum rent clause, only the
actual royalty will be paid to the landlord. Moreover, it also gives incentive to the lessee to enhance
production or sales because he is bound to pay minimum rent.
Redeemable Minimum Rent
Generally, when minimum rent is more than royalty, then minimum rent is payable if no such provision
is given in the agreement, but if it is mentioned in the agreement that when royalty will be more than
minimum rent, the excess of minimum rent over royalty paid in the earlier years will be written off out
of the excess of the royalty over minimum rent in the coming years such minimum rent is called
Redeemable Minimum Rent.
Shortworkings
The excess of minimum rent over royalty is called ‘Shortworkings’. Minimum Rent – Royalty =
Shortworkings or M.R. – R = S.W.
Recoupment or Writing off Shortworkings
Recoupment of short working refers to recovering the short working of any year, from surplus royalty of
the succeeding years. the Recoupment may be permitted over a stipulated period of time (fixed
Recoupment) or over a specified period following the year of short working (floating Recoupment) or
within the life time of the lease(Recoupment within life time of the lease).
All the conditions regarding recoupment or writing off shortworkings are based on the mutual
agreement between the lessee and lessor. Shortworkings may be recouped in all the future years or it
may be recouped throughout the period of lease. For example, if It recouped during the first four years
www.VipinMKS.com
Page 1
Professor Vipin 2014
of the lease, then recoupment will take place only during the first four years, and not afterwards, in the
fourth year unwritten balance of shortworking will be transferred to the Profit and Loss Account and
future year’s shortworkings will also be transferred to the Profit and Loss Account of the concerning
year.
Accounting entries in the books of lessee
a) Without minimum rent account is not opened
Sl.
No.
Circumstances
Royalties are less than the Royalties are more than the
minimum rent
minimum rent
01
For Royalty payable
Royalties a/c
Dr
Short working a/c
Dr
To Land lord a/c
02
For payment of royalty
Land lord a/c
Royalties a/c
Dr
To Short working a/c
To Land lord a/c
Dr
To Bank a/c
03
For transfer of royalty
Profit and loss a/c
Dr
To Royalty a/c
In case short working is not completely recovered (non-recovery of short working)
04
For transfer of short- Profit and loss a/c
Dr
working
To Short working a/c
b) With minimum rent account is opened
Sl.
No.
Circumstances
01
For minimum
payable
02
Royalties are less than the Royalties are more than the
minimum rent
minimum rent
rent Minimum rent a/c
For Royalty payable
Dr
No entry
To land lord a/c
Royalties a/c
Dr
Short working a/c
Dr
To minimum rent a/c
03
For payment of royalty
Land lord a/c
Dr
To Bank a/c
04
For transfer of royalty
Profit and loss a/c Dr
To Royalty a/c
www.VipinMKS.com
Page 2
Professor Vipin 2014
In case short working is not completely recovered (non-recovery of short working)
05
For transfer of short- Profit and loss a/c
Dr
working
To Short working a/c
Accounting entries in the books of lessor
Sl.
No.
Circumstances
Royalties are less than the minimum Royalties are more than the
rent
minimum rent
01
For
receivable
Lessee’s a/c Dr
Royalty
Lessee’s a/c Dr
To Short working suspense a/c
Short working suspense a/c Dr
To Royalties receivable a/c
02
03
For
receipt
royalty
of Bank a/c
For transfer
royalty
of Royalty receivable a/c Dr
To Royalties receivable a/c
Dr
To Lessee’s a/c
To Profit and loss a/c
In case short working is not completely recovered (non-recovery of short working)
04
For transfer of short- Short working suspense a/c
working
To Profit and loss a/c
www.VipinMKS.com
Dr
Page 3
Professor Vipin 2014
Example 1
X Coal Ltd has taken a leas coal field from Y on the following terms:
1) Lease is for 99 years
2) Lease rent is to be 50p per annum for every ton of coal raised
3) Minimum royalty per annum to be Rs. 30,000; the lessee has a right to recoup any
shortworkings for a period of 3 years for which excess payment was made.
4) In case the working of mines was affected by any strike or riot and if there was no raising of
coal, minimum rent payable would abate proportionately.
5) The following were the raisings for different years:
Tons
Year
Raised
1990
20000
1991
35000
1992
30000
(Strike for
3 months
where no
coal was
mined)
1993
70000
1994
80000
1995
100000
Prepare royalty, shortworkings and landlord’s accounts in the books of X Coal Ltd.
Solution 1
Books of Coal Ltd
Statement of Royalty Payable
Shortworkings Shortworkings
Year
Royalty Shortworkings Recouped
Not Recouped
1990
10000
20000
1991
17500
12500
1992
15000
7500
1993
35000
5000
15000
1994
40000
10000
2500
1995
50000
7500
www.VipinMKS.com
Page 4
Professor Vipin 2014
Royalty Account
Date
1990
1991
1992
Particulars
To Y
To Y
To Y
1993 To Y
1994 To Y
1995 To Y
Amount
10000
17500
15000
35000
40000
50000
Date
1990
1991
1992
Particulars
By Production A/C
By Production A/C
By Production A/C
1993 By Production A/C
1994 By Production A/C
1995 By Production A/C
Amount
10000
17500
15000
35000
40000
50000
Shortworkings Account
Date
Particulars
1990 To Y
Amount
20000
Date
Particulars
1990 By Bal C/D
Amount
20000
1991 To Bal b/d
1991 To Y
20000
12500
32500
1991 By Bal C/D
32500
32500
7500
40000
1992 By Bal C/D
1992 To Bal b/d
To Y
1993 To Bal b/d
40000
32500
40000
By Y (part of
shortworkings
1993 recovered)
By P&L A/C
(shortworkings not
recovered in 1990)
By Bal C/D
40000
1994 To Bal b/d
20000
1994 By Y
By P&L A/C
(shortworkings not
recovered in 1991)
By Bal C/D
1995 To Bal B/D
www.VipinMKS.com
7500
40000
1995 By Y
5000
15000
20000
40000
10000
2500
7500
20000
7500
Page 5
Professor Vipin 2014
Y Account
Date
Particulars
1990 To Bank
Amount
30000
Date
Particulars
1990 By Royalty a/c
By Shortworkings A/C
Amount
10000
20000
30000
1991 By Royalty a/c
By Shortworkings A/C
17500
12500
30000
1992 By Royalty a/c
By Shortworkings A/C
15000
7500
22500
5000
30000
35000
1993 By Royalty a/c
35000
10000
30000
40000
1994 By Royalty a/c
7500
42500
50000
1995 By Royalty a/c
30000
1991 To Bank
30000
30000
1992 To Bank
22500
22500
1993 To Shortworkings A/C
To Bank
1994 To Shortworkings A/C
To Bank
1995 To Shortworkings A/C
To Bank
35000
40000
40000
50000
50000
Example 2
B wrote a book on accountancy and had it published from A on terms that royalties will be 15% on the
published price of the copies sold with a minimum of Rs. 10000 per year. B gave an undertaking to revise
the book when requested by the publisher and to pay Rs. 500 to A per month for every month of the
delay after six months of the request made by A. In the event of delay, the condition of the minimum
amount Rs. 10000 payable to B was not applicable. This arrangement was to last for 10yrs, in the 1st
instance. The number of copies sold and published is as follows:
Date
Copies Sold
1995
1996
1997
1998
1999
www.VipinMKS.com
Price
2000
4000
5000
2000
6000
20
20
25
25
30
Page 6
Professor Vipin 2014
At end of 1997, B was requested to revise the book. The revised manuscript reached A only on 1st
November 1998. Pass the journal entries and prepare ledger accounts in the books of A and B.
Solution 2
In the Books of A
A’s Journal
Date
Particulars
1995 Royalties A/C
Shortworkings A/C
To B
(Being royalty @15% on Rs. 40000 subject to
minimum Rs. 10000)
1995 B
To Bank
(Being payment made to b)
1995 Profit and Loss A/C
To Royalties A/C
To Shortworkings A/C
(being transfer of royalties a/c and
shortworkings a/c to P&L a/c
1996 Royalties A/C
To B
(Being Royalty @15% on Rs. 80000)
1996 B
To Bank
(Being payment made to b)
1996 Profit and Loss A/C
To Royalties A/C
(being transfer of royalties a/c to P&L a/c)
1997 Royalties A/C
To B
(Being Royalty @15% on Rs. 125000)
1997 B
To Bank
(Being payment made to b)
1997 Profit and Loss A/C
To Royalties A/C
(being transfer of royalties a/c to P&L a/c)
1998 Royalties A/C
To B
www.VipinMKS.com
Amount
Amount
6000
4000
10000
10000
10000
10000
6000
4000
12000
12000
12000
12000
12000
12000
18750
18750
18750
18750
18750
18750
7500
7500
Page 7
Professor Vipin 2014
(Being royalty @15% on Rs. 50000 condition of
min amount does not apply as B delayed
revision work beyond 6 months)
1998 B
To Damages Recovered a/c
To Bank
1998
1998
1999
1999
1999
(Payment of sum due Rs. 2000 being
compensation for delay by B transferred to
Damages Recovered account)
Profit and Loss A/C
To Royalties A/C
(being transfer of royalties a/c to P&L a/c)
Damages Recovered a/c
To Profit and Loss A/C
Royalties A/C
To B
(Being Royalty @15% on Rs. 180000)
B
To Bank
(Being payment made to b)
Profit and Loss A/C
To Royalties A/C
(being transfer of royalties a/c to P&L a/c)
7500
2000
5500
7500
7500
2000
2000
27000
27000
27000
27000
27000
27000
Since the publisher does not have the right to recoup shortworkings, the shortworkings of each year
have been transferred to profit and loss account.
A’s Ledger
Royalties Account
Date
Particulars
1995 To B
Amount
6000
Date
Particulars
1995 By P&L A/C
Amount
6000
1996 To B
12000
1996 By P&L A/C
12000
1997 To B
18750
1997 By P&L A/C
18750
1998 To B
7500
1998 By P&L A/C
7500
1999 To B
27000
1999 By P&L A/C
27000
www.VipinMKS.com
Page 8
Professor Vipin 2014
B’s Account
Date
Particulars
1995 To Bank
Amount
10000
Date
Particulars
By Royalties A/C
By Shortworkings A/C
10000
Amount
6000
4000
10000
1996 To Bank
12000
By Royalties A/C
12000
1997 To Bank
To Damages
1998 Recovered
To Bank
18750
By Royalties A/C
18750
2000
5500
7500
By Royalties A/C
7500
27000
By Royalties A/C
1999 To Bank
7500
27000
Shortworkings A/C
Date
Particulars
1995 To B
Amount
4000
Date
Particulars
1995 By P&L A/C
Amount
4000
Damages Recovered A/C
Date
Particulars
1995 To P&L
Amount
2000
Date
Particulars
1995 By B
Amount
2000
B’s Journal
Date
Particulars
1995 A
To Royalties A/C
(Being royalty @15% on Rs. 40000 subject to
minimum Rs. 10000)
1995 Bank A/C
To A
(Receipt of Sum due)
1995 Royalties A/C
To Profit and Loss A/C
(being transfer of royalties a/c to P&L a/c)
1996 A
To Royalties A/C
www.VipinMKS.com
Amount
Amount
10000
10000
10000
10000
10000
10000
12000
12000
Page 9
Professor Vipin 2014
1996
1996
1997
1997
1997
1998
1998
1998
1999
1999
1999
(Being Royalty @15% on Rs. 80000)
Bank A/C
To A
(Receipt of Sum due)
Royalties A/C
To Profit and Loss A/C
(being transfer of royalties a/c to P&L a/c)
A
To Royalties A/C
(Being Royalty @15% on Rs. 50000)
Bank A/C
To A
(Receipt of Sum due)
Royalties A/C
To Profit and Loss A/C
(being transfer of royalties a/c to P&L a/c)
A
To Royalties A/C
(Being Royalty @15% on Rs. 50000)
Bank A/C
Damages A/C
To A
(Receipt of sum due less Rs. 20000 due to delay
in revising book by 4 months)
Profit and Loss A/C
To Damages A/c
(P&L a/c debited by the damages paid)
A
To Royalties A/C
(Being Royalty @15% on Rs. 180000)
Bank A/C
To A
(Receipt of Sum due)
Royalties A/C
To Profit and Loss A/C
(being transfer of royalties a/c to P&L a/c)
www.VipinMKS.com
12000
12000
12000
12000
18750
18750
18750
18750
18750
18750
7500
7500
5500
2000
7500
2000
2000
27000
27000
27000
27000
27000
27000
Page 10
Professor Vipin 2014
B’s Ledger
Royalties Account
Date
Particulars
1995 To P&L A/C
Amount
10000
Date
Particulars
1995 By A
Amount
10000
1996 To P&L A/C
12000
1996 By A
12000
1997 To P&L A/C
18750
1997 By A
18750
1998 To P&L A/C
7500
1998 By A
7500
1999 To P&L A/C
27000
1999 By A
27000
A’s Account
Date
Particulars
1995 To Royalties A/C
Date
10000
Particulars
By Bank
1996 To Royalties A/C
12000
By Bank
12000
1997 To Royalties A/C
18750
By Bank
18750
1998 To Royalties A/C
7500
By Bank
5500
By Damages A/C
2000
7500
7500
1999 To Royalties A/C
www.VipinMKS.com
27000
By Bank
Amount
10000
27000
Page 11