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

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:-

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

Journal Entries

In the books of lessee

Journal Entries

In the books of Landlord (Lessor)

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 :

Journal Entries

In the books of lessee.

In the books of Lessor (Landlord)

Journal entries

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