Royalty Accounts

Professor Vipin 2014
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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


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 years 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
minimum rent
Royalties are more than the
minimum rent
01 For Royalty payable Royalties a/c Dr
Short working a/c Dr
To Land lord a/c
Royalties a/c Dr
To Short working a/c
To Land lord a/c
02 For payment of royalty 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-
working
Profit and loss a/c Dr

b) With minimum rent account is opened
Sl.
No.
Circumstances Royalties are less than the
minimum rent
minimum rent
01 For minimum rent
payable
Minimum rent a/c Dr
To land lord a/c
No entry
02 For Royalty payable 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


working
Profit and loss a/c Dr

Accounting entries in the books of lessor
Sl.
No.
Circumstances Royalties are less than the minimum
rent
minimum rent
01 For Royalty
receivable
Lessees a/c Dr
To Short working suspense a/c
To Royalties receivable a/c
Lessees a/c Dr
Short working suspense a/c Dr
To Royalties receivable a/c
02 For receipt of
royalty
Bank a/c Dr
To Lessees a/c
03 For transfer of
royalty
Royalty receivable a/c Dr
To Profit and loss a/c
working
Short working suspense a/c Dr
To Profit and loss a/c



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:
Year
Tons
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 landlords accounts in the books of X Coal Ltd.
Solution 1
Books of Coal Ltd
Statement of Royalty Payable
Year Royalty Shortworkings
Shortworkings
Recouped
Shortworkings
Not Recouped
1990 10000 20000
1991 17500 12500
1992
15000 7500
1993 35000 5000 15000
1994 40000 10000 2500
1995 50000 7500


Royalty Account
Date Particulars Amount Date Particulars Amount
1990 To Y 10000 1990 By Production A/C 10000
1992
To Y 15000
1992
By Production A/C 15000

Shortworkings Account
1990 To Y 20000

1990 By Bal C/D 20000
1991 To Bal b/d 20000

1991 By Bal C/D 32500
1991 To Y 12500

32500

32500
1992 To Bal b/d 32500

1992 By Bal C/D 40000
To Y 7500

40000

40000
1993 To Bal b/d 40000

1993
By Y (part of
shortworkings
recovered) 5000

By P&L A/C
(shortworkings not
recovered in 1990) 15000

By Bal C/D 20000
40000

40000
1994 To Bal b/d 20000

1994 By Y 10000

By P&L A/C
(shortworkings not
recovered in 1991) 2500

By Bal C/D 7500

20000
1995 To Bal B/D 7500 1995 By Y 7500



Y Account
1990 To Bank 30000 1990 By Royalty a/c 10000

By Shortworkings A/C 20000
30000

30000

1991 To Bank 30000

1991 By Royalty a/c 17500

30000

30000
1992 To Bank 22500


22500

22500
1993 To Shortworkings A/C 5000

To Bank 30000

35000

35000

To Bank 30000

40000

40000

To Bank 42500

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 1
st

instance. The number of copies sold and published is as follows:
Date Copies Sold Price
1995 2000 20
1996 4000 20
1997 5000 25
1998 2000 25
1999 6000 30



At end of 1997, B was requested to revise the book. The revised manuscript reached A only on 1
st

November 1998. Pass the journal entries and prepare ledger accounts in the books of A and B.
Solution 2
In the Books of A
As Journal
Date Particulars Amount Amount
1995 Royalties A/C 6000
Shortworkings A/C 4000
To B 10000

(Being royalty @15% on Rs. 40000 subject to
minimum Rs. 10000)
1995 B 10000
To Bank 10000
(Being payment made to b)
1995 Profit and Loss A/C 10000
To Royalties A/C 6000
To Shortworkings A/C 4000

(being transfer of royalties a/c and
shortworkings a/c to P&L a/c
To B 12000
(Being Royalty @15% on Rs. 80000)
1996 B 12000
To Bank 12000
(being transfer of royalties a/c to P&L a/c)
To B 18750
1997 B 18750
To Bank 18750
To B 7500


(Being royalty @15% on Rs. 50000 condition of
min amount does not apply as B delayed
revision work beyond 6 months)
1998 B 7500
To Damages Recovered a/c 2000
To Bank 5500

(Payment of sum due Rs. 2000 being
compensation for delay by B transferred to
Damages Recovered account)
1998 Damages Recovered a/c 2000
To Profit and Loss A/C 2000
To B 27000
1999 B 27000
To Bank 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.
As Ledger
Royalties Account
1995 To B 6000 1995 By P&L A/C 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



Bs Account
1995 To Bank 10000 By Royalties A/C 6000

10000 10000
1998
To Damages
Recovered 2000 By Royalties A/C 7500
To Bank 5500
7500 7500

Shortworkings A/C
1995 To B 4000 1995 By P&L A/C 4000

Damages Recovered A/C
1995 To P&L 2000 1995 By B 2000

Bs Journal
Date Particulars Amount Amount
1995 A 10000

(Being royalty @15% on Rs. 40000 subject to
minimum Rs. 10000)
1995 Bank A/C 10000
To A 10000
(Receipt of Sum due)
1996 A 12000


1996 Bank A/C 12000
To A 12000
1997 A 18750
1997 Bank A/C 18750
To A 18750
1998 A 7500
1998 Bank A/C 5500
Damages A/C 2000
To A 7500

(Receipt of sum due less Rs. 20000 due to delay
in revising book by 4 months)
To Damages A/c 2000
(P&L a/c debited by the damages paid)
1999 A 27000
1999 Bank A/C 27000
To A 27000



Bs Ledger
Royalties Account
1995 To P&L A/C 10000 1995 By A 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

As Account
Date Particulars Date Particulars Amount
1995 To Royalties A/C 10000 By Bank 10000
By Damages A/C 2000
7500 7500

Royalty Accounts

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Professor Vipin 2014

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