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Royalty Accounts CA Foundation Notes

Royalty Accounts – CA Foundation, CPT notes, PDF

This article is about Royalty Accounts for CA foundation CPT students. we also provide PDF file at the end.

royalty accounts ca foundation notes

Royalty Accounts ca foundation notes

What we will study in Royalty Accounts CA Foundation Notes:

18.1   MEANING OF ROYALTY

♦        Royalty is a payment made for the use of a special right.

♦    The sum payable as consideration for use of any special right, for a definite period, according to mutual agreement, and based on prescribed terms and conditions, is treated as royalty.

♦        It includes consideration payable for the use of both intellectual, property and physical assets.

The Amount is mostly payable on

  1. Patented article
  2. Mining operations.
  3. Publishing of a book.
  4. Manufacturing etc.

Types of Royalties

  1. Copyright
  2. Mining
  3. Patent
  4. Trademark etc.

18.2   MINIMUM RENT

It is the fixed minimum amount that has to be paid to the landlord. The reason behind fixing minimum rent is to avoid the loss that may be suffered by the landlord in case of less amount of royalty.        .

If in any year the amount of royalty is less than the amount of minimum rent (as mentioned in the agreement of royalty), the amount of minimum rent will be payable by the lessee. If the amount of royalty is more, the amount of royalty will be paid.

Shortworkings

Short workings is the amount by which minimum rent exceeds royalty. Thus, [Minimum Rent – Royalty Shortworkings (s.w.)]

In the case of short-workings, that is, if in any year royalty will be less than minimum rent, the amount of minimum rent has to be paid.

Redeemable shortworkings : Amount of short workings which may be recouped is known as Redeemable short workings.

Recoupment or writing off shortworkings : When royalty is more than minimum rent, the amount of short workings of the earlier periods may be recouped /written off out of the excess royalty amount over minimum rent. All the conditions regarding recoupment of shortworkings are based on the mutual agreement of the lessor and lessee.

Accounting records for Mining Royalties : The person who gives the mine on lease, is called lessor or landlord. The person who takes it on lease is known as lessee. The amount of royalty is payable by the lessee to the lessor.

Accounting entries in the books of Lessee

(a)  When Royalty is less than minimum rent

(i)            When Royalty is payable

Royalties a/c                                                                                 Dr.

Shortworkings a/c                                                                         Dr.

To Landlord a/c

(Being royalties earned and short workings to be payable to the landlord.)

(ii) When payment is made

Landlord a/c                                                                                  Dr.

To Bank a/c

(Being amount paid to landlord)

(iii) For closing royalty at the end of the year

Profit and loss a/c                                                                         Dr.

To Royalty a/c

(Being amount of royalty transferred to Profit & Loss a/c)

(b)  When Royalty is more than minimum rent

(i) When Royalty is payable

Royalties a/c                                                                                 Dr.

To Landlord a/c

(Being royalties earned & payable to landlord)

(ii)            For writing off shortworkings, if any

Landlord a/c                                                                                  Dr.

To shortworkings a/c

(Being recoupment of shortworkings of earlier years)

(iii) For payment of amount

Landlord a/c                                                                                  Dr.

To Bank a/c

(Being payment made to landlord)

OR

In place of above two entries, the following combined entry can be passed :

Landlord a/c                                                                                  Dr.

To shortworkings a/c

To Bank a/c

(Being recoupment of shortworkings and balance paid)

(iv) For closing Royalty at the end of the year

Profit and loss a/c                                                                         Dr.

To Royalties a/c

(Being transfer of royalty amount to Profit & Loss a/c)

Accounting entries in the books of Landlord/Lessor

(a) When Royalty is less than minimum rent

(i) At the time when royalty is receivable

Lessee’s a/c                                                                                 Dr.

To Royalty receivable a/c

To Royalty Reserve/suspense a/c

(Being the amount of royalty receivable and the difference between minimum rent and royalties receivable transferred to royalty reserve a/c)

(ii) When payment is received

Bank a/c                                                                                          Dr.

To Lessee’s a/c

(Being the amount received from lessee)

(iii) For closing royalty receivable a/c

Royalty receivable a/c                                                                    Dr.

To Profit & loss a/c

(Being transfer of royalties receivable to Profit & Loss a/c)

(b) When Royalty is more than minimum rent

(i) When Royalty is receivable

Lessee’s a/c                                                                                    Dr.

To Royalty receivable a/c

(Being the amount of royalties receivable earned)

(ii) For writing off Royalty reserve a/c and on receipt of royalty amount

Royalty res erve / suspense a/c                                                     Dr.

To Lessee’s a/c

(Being the amount of royalty reserve recouped and the balance received from lessee)

(iii) For closing royalty receivable a/c

Royal ties receivable a/ c                                                               Dr.

To Profit and loss a/c

(Being transfer of royalties a/c to Profit and loss a/c)

Journal Entries regarding minimum Rent

(i) Royalty a/c                                                                        Dr.

Shortworking  a/c                                                                   Dr.

To Minimum Rent a/c

(ii) Minimum Rent a/c                                                            Dr.

To Landlord a/c

Note : Minimum rent a/c may be opened only in those years when royalty is less than minimum rent.

Illustration 18.1

Minimum Rent – Rs. 2,000.

Royalty rate is Rs. 1 per ton.

Output for 5 years were as follows:-

1st year400 tons
Ilnd year1,700 tons
IIIrd year2,000 tons
IVth year3,900 tons
Vth year5,000 tons

Short working of any year may be recouped throughout the life of the lease.

Give analytical table, journal entries in the books of lessee and in the books of lessor. Solution :

Analytical Table

Yr.outputRoyalty @ 1Min.Rent (MR)Shortworking (SIT)RecoupmentLandlordPaymentTransfer toP&L a/c
I400400200016002000
II1700170020003002000
III2000200020002000
IV390039002000_19002000
V5000500020005000

Journal Entries

In the books of lessee

S.No.ParticularsL.F.Amount Rs.Amount Rs.
1st year
1.When royalty is payable :-
Royalty a/cDr.400
Short working a/cDr.1600
To Landlord a/c2000
2.When payment is made :-
Landlord a/cDr.2000
To Cash/Bank a/c2000
3.For closing royalty a/c :-
Profit/Loss a/cDr.400
To Royalty a/c400
Ilnd year
1.When Royalty is payable :-
Royalty a/cDr.1700
Short working a/cDr.300
To Landlord a/c2000
2.When payment is made :-
Landlord a/cDr.2000
To Cash/Bank a/c2000
3.For closing royalty a/c :-
Profit & loss a/cDr.1700
To Royalty a/c1700
Illrd year
1.When royalty is payable :-
Royalty a/cDr.2000
To Landlord a/c2000
2.When payment is done :-
Landlord a/cDr.2000
To Bank a/c2000
3.For closing royalty a/c at the end of the year :-
Profit & Loss a/cDr.2000
To Royalty a/c2000
IVth year
1.When royalty is payable :-
Royalty a/cDr.3900
To Landlord a/c3900
2.For writing off shortworkings and payment of amount :-
Landlord a/cDr.3900
To Bank a/c2000
To short working a/ c1900
3.For closing royalty a/c :-
Profit & Loss a/cDr.3900
To Royalty a/c3900
Vth year
1.When royalty is payable :-Royalty a/c

To Landlord a/c

Dr.50005000
2.For payment of amount :-Landlord a/c

To Bank a/c

Dr.50005000
3.For closing royalty a/c :-Profit & Loss a/c

To Royalty a/c

Dr.50005000

Journal Entries

In the books of Landlord (Lessor)

S.No.ParticularsL.F.Amount Rs.Amount Rs.
1st year
1.When royalty is receivable :-Lessee a/c

To Royalty receivable a/c

To Royalty Reserve/suspense a/c

Dr.20004001600
2.When payment is received :-Bank a/c

To Lessee

Dr.20002000
3.For closing royalty receivable a/c :-Royalty receivable a/c

To P/L a/c

Dr.400400
Ilnd year
1.When Royalty is receivable :-Lessee’s a/c

To Royalty receivable a/c

To Royalty reserve a/c

Dr.20001700300
2.When payment is received :-Bank a/c

To Lessee’s a/c

Dr.20002000
3.For closing royalty receivable a/c :-Royalty receivable a/c

To P/L a/c

Dr.17001700
Illrd year
1.When royalty is receivable Lessee’s a/cTo Royalty receivable a/cDr.20002000
2.When payment is received :~ Bank a/cTo Lessee’s a/cDr.20002000
3.For closing royalty receivable a/c
Royalty receivable a/cDr.2000
To P/L a/c2000
IVth year
1.When royalty is receivable :-
Lessee’s a/cDr.3900
To Royalty receivable a/c3900
2.For writing off royalty reserve and receipt of payment of royalty :-
Bank a/cDr.2000
Royalty reserve a/cDr.1900
To Lessee’s a/c3900
3.For closing royalty receivable a/c :-
Royalty receivable a/cDr.3900
To P/L a/c3900
Vth year
1.When royalty is receivable :-
Lessee’s a/cDr.5000
To Royalty receivable a/c5000
2.When royalty is received :-
Bank a/cDr.5000
To Lessee’s a/c5000
3.For closing royalty receivable a/c :-
Royalty receivable a/cDr.5000
To P/L a/c5000

Illustration. 18.2 Minimum rent Rs. 5000 p.a.

Royalty rate 50 paise per ton

Production :     1st year 8000

2nd year 9000

3rd year 10600

4th year 10800

5th year 12000

Short working of any year may be recouped in following 3 years only. Give analytical table, journal entries in the books of Lessee and Lessor.

Solution :

YearOutputRoyalty @ 50 paisa(MR.)(SW.)RecoupmentPaymentP/L a/c
I80004000500010005000
II9000450050005005000
III10600530050003005000
IV10800540050004005000300
V12000600050005005500

Journal Entries

In the books of lessee.

s.No.ParticularsL.F.Amount Rs.Amount Rs.
1st year :-
1.Royalty a/cDr.4,000
Short workings a/cDr.1,000
To Landlord a/c5,000
(Being royalties earned and short working to be payable to the landlord)
2.Landlord a/cDr.5,000
To Cash/Bank a/c5,000
(Being amount paid to landlord).
3.Profit and loss a/cDr.4,000
To Royalty a/c4,000
(Being royalty amount transferred to Profit & loss a/c)
Il nd year :-
4.Royalty a/cDr.4,500
Shortworkings a/cDr.500
To Landlord a/c5,000
(Being royalties earned and shortworkings payable to Landlord)
5.Landlord a/cDr.5,000
To Cash/Bank a/c5,000
(Being amount paid to landlord)
6,Profit and loss a/cDr.4,500
To Royalty a/c4,500
(Being amount transferred to Profit and loss a/c)
Ill-rd year : –
7.Royalty a/cDr.5,300
To Landlord a/c5,300
(Being royalties earned & payable to Landlord)
8.Landlord a/cDr.5,300
To Bank a/c5,000
To Short workings a/c300
(Being amount paid to landlord along with recoupment of short workings of earlier years).
9.Profit and loss a/cDr.5,300
To Royalty a/c5,300
(Being transfer of royalties to the Profit and loss a/c)
IVth year :-
10.Royalty a/cDr.5,400
To Landlord a/c5,400
(Being royalties payable to landlord)
11.Landlord a/cDr.5,400
To Bank a/c5,000
To Shortworkings a/c(Being recoupment of shortworkings & balance transferred to Landlord)400
12.Profit and loss a/cDr.5,700
To Royalty a/c5,400
To Shortworking a/c300
(Being royalty and unrecouped shortworkings transferred to P/L a/c)
Vth year :-
13.Royalty a/cDr.6,000
To Landlord a/c6,000
(Being royalty payable to landlord)
14.Landlord a/cDr.6,000
To Bank a/c5,500
To Shortworkings a/c500
(Being recoupment of shortworkings and balance paid to Landlord.)
15.Profit and loss a/cDr.6,000
To Royalty a/c6,000
(Being amount transferred to P/L a/c)

In the books of Lessor (Landlord)

Journal entries

S.No.ParticularsL.F.Amount Rs.Amount Rs.
1st year :-
1.Lessee’s a/cDr.5,000
To Royalty receivable a/c4,000
To Royalty Reserve/suspense a/c1,000
(Being the amount of royalty receivable and the difference between minimum rent and royalties receivable transferred to Royalty reserve a/c)
2.Bank a/cDr.5,000
To Lessee’s a/c5,000
(Being the amount received from lessee)
3.Royalty receivable a/cDr.4,000
To Profit & loss a/c4,000
(Being transfer of royalties receivable to Profit & Loss a/c)
II nd year :-
4.Lessee’s a/cDr.5,000
To Royalty receivable a/c4,500
To Royalty reserve/suspense a/c500
(Being royalties receivable earned and difference between minimum rent and royalties receivable transferred to Royalty reserve a/c)
5.Bank a/cDr.5,000
To Lessee5,000
(Being amount received from lessee)
6.Royalties receivable a/cDr.4,500
To Profit and loss a/c4,500
(Being transfer of royalties receivable a/c to Profit & loss a/c)
III rd year: –
7.Lessee’s a/cDr.5,300
To Royalty receivable a/c5,300
(Being royalties earned and receivable)
8.Bank a/cDr.5,000
Royalty reserve a/cDr.300
To Lessee5,300
(Being royalty received and writing off the amount of royalty reserve)
9.Royalty receivable a/cDr.5,300
To Profit and loss a/c5,300
(Being balance of royalty receivable transferred to Profit and loss a/c)
IVth year :-
10.Lessee’s a/cDr.5,400
To Royalty receivable a/ c5,400
(Being royalties earned and receivable)
11.Bank a/cDr.5,000
Royalty reserve a/cDr.400
To Lessee’s a/c5,400
(Being royalty received and writing off the amount of royalty reserve)
12.Royalty receivable a/cDr.5,400
Royalty reserve a/cDr.300
To profit and loss a/c5,700
(Being amount transferred to Profit and loss a/c)
Vth year :-
13.Lessee’s a/cDr.6,000
To Royalty receivable a/c6,000
(Being royalty earned and receivable)
14.Bank a/cDr.5,000
Royalty reserve a/cDr.500
To Lessee6,000
(Being royalty received and writing off the amount of royalty reserve)
15.Royalty receivable a/cDr.6,000
To Profit and Loss a/c6,000
(Being amount of royalty receivable transferred to P/L a/c)

PRACTICE PROBLEMS

Pl.SKCo. is lessee of a mine on a royalty of Rs. 1 per ton of coal raised with a minimum rent of Rs. 8,000 per annum with power to recoup S.W. during the first two years of the lease only, The output for the first three years is as follows: 5,000 ton in Year 2013;9,000 ton inYear2014;8,000 ton in Year 2 015. Books are closed each year on31stDecember,Pass the necessary Journal entries in the books of the landlord. Also open SK Co. Account and Royalty Reserve Account.

P2. Marshal took a mine on lease for 20 Years. Rate of Royalty is Rs. 1 per ton. Minimum rent is Rs. 8,000 per Year. S.W. of that year will not be recouped in which yield will be less than 4,000 ton and the year in which royalty will be more than minimum rent, only 50% of excess will be used for recoupment of short workings.

Prepare the necessary accounts in the books of lessee when the yield for first four Years respectively is 3,500 ton, 7,000 ton 7,500 ton and 9,000 ton.

ANSWERS AND HINTS FOR PRACTICE PROBLEMS

P. No.Answers & Hints
1Shortworkings transferred to P&L Account in Year 2014 Rs. 2,000
2Balance in short working account in fourth year Rs. 1,000

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