ROYALTY ACCOUNT
Royalty
Write short not on following:
a) Royalty
b) Minimum Rent OR Dead Rent.
c) Short-working
d) Recoupment of Short-Working
e) Sub-Lease.
Ans.
(a) Royalty. The term 'Royalty' is used to denote the periodic payment made by one person called lessee to another person called lessor for using the right by the lessee vested in the lessor. For example, if X is the owner of coal mine, and instead of extracting the coal himself, he concedes this right to Y in return for amount calculated on the basis of coal extracted from the mine, such a payment is called 'Royalty'.
Royalties are usually payable in the following cases:
(a) For the extraction of oil, coal, and minerals from the ground
(b) To an author for sale of his books.
(c) To holder of patent rights for the use of his patent by other manufacturer.
Nature of Royalty Account:- Royalty Account is nominal in the nature. So it is debited in the books of party paying it and credited in the books of the party receiving it. As it is a nominal account, the amount is transferred either to P & L Account or Production Account, depending upon its treatment as direct or indirect expenses as the case may be.
(b) Minimum Rent or Dead Rent: Minimum Rent is also called 'Dead Rent' or 'Rock Rent' or Fixed Rent. As the name suggests, this is the minimum amount of rent which the lessee is required to pay to the lessor whether he has derived any benefit or not out of the right vested to him by the lessor. Thus, if in any year the actual royalty is less than the minimum rent, the landlord will claim the minimum rent. But in the years when actual royalty exceeds Minimum Rent, the landlord will claim the actual royalty. Moreover, Minimum Rent may be the same for each year or may vary for different years according to the terms of agreement. For example. If X has taken a lease of mine with minimum rent of Rs. 10,000 for a year and with a rate of royalty at Rs. 2 per tonne of coal extracted. if coal extracted in the first year is 4000 tonnes then Royalty comes to Rs. 8000 i.e. 4000 tonnes X Rs. 2 per tonne but (x) has to pay Rs. 10,000 as it is the minimum rent decided under the Royalty agreement. Thus, Minimum Rent will assure a guaranteed income per year to lessor.
(c) Short Working:- The excess of Minimum Rent over the Actual Royalty is known as short-working. Therefore short- working will only arise when the Actual royalty is less than the Minimum Rent. In the above example as given in Minimum Rent. Short-working for the year will be Rs. 2000 i.e. [M.R. (10,000)- Royalty (8,000)].
(d) Recoupment of short Working:- When the Royalty agreement contains the clause that lessee can recover the short working of one year from the excess of Royalty as compared to Minimum Rent in the coming years, it is known as Recoupment of short working.
However, the right of recoupment can be of two types;
1. Fixed Right
2. Floating Right.
(1) Fixed Right of Recoupment:- When the lessor promises the lessee to compensate the loss (short working) only for a fixed time period. The right is said to be fixed. For example. If lessor promises to compensate the loss only during the first 4 years, the right is said to be fixed and any unrecouped balance of short-working will be transferred to P & L A/c Any short working arises in some future years cannot be recouped.
(2) Floating Right of Recoupment:- When the lessor promises the lessee to compensate the short working of any year in the next two or three years. Then the right is said to be floating. For example, if lessor promises to compensate the (short-working) of any year in coming 2 years. Then short- working of 3rd year can be recouped in 4th and 5th year and short-working of 8th year in 9th and 10th year. (e) Sub-lease:- When the actual lessee transfers a part of right of asset acquired by him to another person, it is known as situation of sub-lease. In such a case, actual lessee assumes the double position in the whole scenario. He is lessee for actual owner but landlord for the sub-lessee. So, in sub-lease, actual lessee recovers the royalty from sub-lessee on the rate decided between him and sub-lessee and transfer the amount along with his own payment for Royalty to actual owner as per agreement between him and landlord.
Q. Give Journal Entries in the books of the lessee and lessor (Landlord) in the following cases.
(i) Where no minimum Rent exists; and
(ii) Where a minimum Rent exists with right of recoupment.
Ans.
(i) Where no minimum rent exists: The following are the journal entries in books of lessee and lessor when no minimum rent exists. JOURNAL ENTRIES (IN BOOKS OF LESSEE)
(1) Fro Royalty becoming Due.
Royalty A/c Dr. To landlord A/c
(2) Fro Payment of Royalty Landlord A/c Dr. To Bank/Cash A/c
(3) For Transferring Royalty to profit and Loss /Production A/c P & L A/c Production A/c Dr. To Royalty A/c
www.google.com/ptyagi0009
Write short not on following:
a) Royalty
b) Minimum Rent OR Dead Rent.
c) Short-working
d) Recoupment of Short-Working
e) Sub-Lease.
Ans.
(a) Royalty. The term 'Royalty' is used to denote the periodic payment made by one person called lessee to another person called lessor for using the right by the lessee vested in the lessor. For example, if X is the owner of coal mine, and instead of extracting the coal himself, he concedes this right to Y in return for amount calculated on the basis of coal extracted from the mine, such a payment is called 'Royalty'.
Royalties are usually payable in the following cases:
(a) For the extraction of oil, coal, and minerals from the ground
(b) To an author for sale of his books.
(c) To holder of patent rights for the use of his patent by other manufacturer.
Nature of Royalty Account:- Royalty Account is nominal in the nature. So it is debited in the books of party paying it and credited in the books of the party receiving it. As it is a nominal account, the amount is transferred either to P & L Account or Production Account, depending upon its treatment as direct or indirect expenses as the case may be.
(b) Minimum Rent or Dead Rent: Minimum Rent is also called 'Dead Rent' or 'Rock Rent' or Fixed Rent. As the name suggests, this is the minimum amount of rent which the lessee is required to pay to the lessor whether he has derived any benefit or not out of the right vested to him by the lessor. Thus, if in any year the actual royalty is less than the minimum rent, the landlord will claim the minimum rent. But in the years when actual royalty exceeds Minimum Rent, the landlord will claim the actual royalty. Moreover, Minimum Rent may be the same for each year or may vary for different years according to the terms of agreement. For example. If X has taken a lease of mine with minimum rent of Rs. 10,000 for a year and with a rate of royalty at Rs. 2 per tonne of coal extracted. if coal extracted in the first year is 4000 tonnes then Royalty comes to Rs. 8000 i.e. 4000 tonnes X Rs. 2 per tonne but (x) has to pay Rs. 10,000 as it is the minimum rent decided under the Royalty agreement. Thus, Minimum Rent will assure a guaranteed income per year to lessor.
(c) Short Working:- The excess of Minimum Rent over the Actual Royalty is known as short-working. Therefore short- working will only arise when the Actual royalty is less than the Minimum Rent. In the above example as given in Minimum Rent. Short-working for the year will be Rs. 2000 i.e. [M.R. (10,000)- Royalty (8,000)].
(d) Recoupment of short Working:- When the Royalty agreement contains the clause that lessee can recover the short working of one year from the excess of Royalty as compared to Minimum Rent in the coming years, it is known as Recoupment of short working.
However, the right of recoupment can be of two types;
1. Fixed Right
2. Floating Right.
(1) Fixed Right of Recoupment:- When the lessor promises the lessee to compensate the loss (short working) only for a fixed time period. The right is said to be fixed. For example. If lessor promises to compensate the loss only during the first 4 years, the right is said to be fixed and any unrecouped balance of short-working will be transferred to P & L A/c Any short working arises in some future years cannot be recouped.
(2) Floating Right of Recoupment:- When the lessor promises the lessee to compensate the short working of any year in the next two or three years. Then the right is said to be floating. For example, if lessor promises to compensate the (short-working) of any year in coming 2 years. Then short- working of 3rd year can be recouped in 4th and 5th year and short-working of 8th year in 9th and 10th year. (e) Sub-lease:- When the actual lessee transfers a part of right of asset acquired by him to another person, it is known as situation of sub-lease. In such a case, actual lessee assumes the double position in the whole scenario. He is lessee for actual owner but landlord for the sub-lessee. So, in sub-lease, actual lessee recovers the royalty from sub-lessee on the rate decided between him and sub-lessee and transfer the amount along with his own payment for Royalty to actual owner as per agreement between him and landlord.
Q. Give Journal Entries in the books of the lessee and lessor (Landlord) in the following cases.
(i) Where no minimum Rent exists; and
(ii) Where a minimum Rent exists with right of recoupment.
Ans.
(i) Where no minimum rent exists: The following are the journal entries in books of lessee and lessor when no minimum rent exists. JOURNAL ENTRIES (IN BOOKS OF LESSEE)
(1) Fro Royalty becoming Due.
Royalty A/c Dr. To landlord A/c
(2) Fro Payment of Royalty Landlord A/c Dr. To Bank/Cash A/c
(3) For Transferring Royalty to profit and Loss /Production A/c P & L A/c Production A/c Dr. To Royalty A/c
www.google.com/ptyagi0009
