Royalty Accounts Questions And Answers Pdf
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The owner of an asset e.
Personal ledger b. Debtors ledger d. Creditors ledger 2.
The owner of an asset e. This payment to the owner by the user of the asset is termed as Royalty. We can therefore say that the royalty is the amount of consideration paid by a party to the owner of the asset in return for the right to use that asset. For example, when a publisher publishes a book, he makes a payment to the author which is based on the number of copies sold known as royalty.
The following are some of cases where one party paid to another in the form of Royalty: 1. A contract is entered into between the landlord and the lessee for payment of royalty, usually calculated upon the quantum of production or sale at a certain stipulated rate. So, if there is little or no production or sale, the landlord would receive little or no royalty at all, thus affects the monetary interest of the landlord as well as the lessee.
It is normally not accept- able to the owner, since sale or production mostly depends on the capacity of the person to. To avoid such a situation, the landlord and the lessee agreed upon a minimum periodical amount that the landlord will receive from the lessee, even if the actual royalty as calculated on the basis of actual production or sale is less than such minimum amount.
Example: Suppose royalty per ton of production is Rs 10 and the minimum annual rent is Rs 4,00, Now, the actual production is 35, tons, then actual royalty would become Rs 3,50, In this case the minimum rent of Rs 4,00, will have to be paid by the lessee. On the other hand, if the actual production is 46, tons, then the actual royalty would become Rs 4,60, In this case Rs 4,60, will have to be paid by the lessee. Thus, as there is a stipulation for minimum rent, then either the minimum rent or the actual royalty whichever more shall have to be paid by the lessee.
Short workings is the amount by which the minimum rent exceeds the actual royalty. It is the difference between Actual Rent and Minimum Rent. In the above example, the short workings is Rs 50, Rs 4,00, - Rs 3,50, Where there is short workings in any period the lessee is liable to pay the minimum rent and, in effect, short workings becomes the part of the minimum rent and not represented by the use of rights.
The question of short workings will arise only when there is a stipulation for minimum rent in the agreement. It refers to the amount by which the actual royalty exceeds the minimum rent. In the above example, the excess workings is Rs 1,10, Rs 4,60, -Rs 3,50, if the production is 46, tons. It refers to the fixed yearly or half-yearly rent payable by the lessee to the landlord in addition to the minimum rent.
Generally the royalty agreement contains a provision for carrying forward of short workings with a view to adjust it in the future. In the subsequent years, such shortworking is adjusted. This process of adjustment is called recoupment of short workings. The right of recoupment of short workings enables the lessee to recover the excess payment, made in the earlier years to meet the condition of payment of minimum rent. A time is usually agreed upon the number of years for which such short workings can be recouped.
This time limit for recoupment of short workings may be fixed or fluctuating. If the short workings can- not be recouped within the specified time, they lapse and are charged to Profit and Loss Ac- count in the year when that specified time limit for recoupment ends. When the lessee can recoup shortworkings within a certain period from the date of the lease it is known as fixed right. For example, short workings can be recouped within three years from the date of the lease.
So, after three years from the date of the lease the short workings cannot be recouped. In this type of agreement, lessee can recoup short workings of any year during the next follow- ing year s. For example, shor tworkings can be recouped in the year subsequent to the year of short workings. So special entry is required for the same except the adjustment of minimum rent for that particular year. Where royalties are calculated on the basis of sales, they are debited to Profit and Loss Account.
In case of a limited company, which does not prepare Manufacturing Account separately, the actual royalties are debited to Profit and Loss Account and they are shown in production or manufacturing section of the Profit and Loss Account. As per agreed terms, short workings can be recouped in the year when the actual royalty is more than the Minimum rent.
Any short workings, which cannot be recouped within the speci- fied period becomes irrecoverable and it should be charged to Profit and Loss Account in the year in which the period ends. However, the recoupable short workings should be carried forward and they are shown in the Balance Sheet as a Current Asset.
To Landlord Account [Actual royalties for the period]. When the royalty agreement does not contain a clause for minimum rent, the question of short workings and its recoupment does not arise. The landlord is always entitled to get either the minimum rent or the actual royalty which- ever is higher subject to any adjustment for short workings recouped. The Bihar Coal Co. According to the lease, the company is to pay Rs 7. Short workings can, however, be recovered out of the royalty in excess of the minimum rent of the next two years only.
The output in tons for the 6 years ending 31st March, is as under: : 10,; : 12,; ,; 20,; 50,; and 15, strike. Fig in Rs. Year Output Actual Min.
Short workings Account Cr. SKG Oil. According to the lease, the company is to pay Rs Short workings can, however, be recovered out of the royalty in excess of the minimum rent of the 1st four years from the date of operation. The output in tons for the 6 years ending 31st March, is as under: Nil; 12,; 15,; 20,; 22,; and : 11, Solution Statement showing Royalty Payable. Excess Shortworkings Short Written RoyaltyPayable Account Cr.
Note: Short workings beyond fourth year can not be recouped since the right of recoupment expired after fourth year. So, the short workings in fifth year to be written off and need not be carried forward. For the same figures as given in illustration 1, prepare necessary accounts in the books of Landlord. Solution :. Date Particulars Amt. Rs Date Particulars Amt. Rs Ltd 75, Ltd 90, Ltd , Ltd , Shortworkings Suspense Account Cr.
Ltd 75, Ltd 60, , , Ltd 75, 1. In some cases the lessee transfers a part to its right of lease to an another party to complete the work under lease with terms and condition as agreed between himself and that party. In these cases, there are three parties, viz. Landlord, lessee and sub-lessee. So far accounting entries are concern, the status of lessee with the sub-lessee is like a landlord. Same as before. In this book both royalty payable and receivable account to be opened since he has two status.
He has to maintain,if any, both short workings and Royalty suspense account. In this case the entry will be from the view point of lessee in normal cases as explained earlier. The terms of payment and the production of 5 years are as below.
In case of strike, royalty earned will discharge all liabilities for the year only. Show ledger accounts in the books of Mayami. Excess Shortworkings Amount Ended Written Shortworkings Account Cr. B y Land lord 1. Dr Cr. A colliery is leased to National Coal Syndicate on a royalty of Re. A minimum rent of Rs. The coal actually raised in a series of years is as follows:. Tonnes 1st year 8, 2nd year 10, 3rd year 18, 4th year 28, 5th year 14, Draw up Royalty account.
Shortworking account and Minimum rent ac- count in the books of the Syndicate. Shortworking recouped 3rd year Rs. A Colliery company took a lease of a coal mine for a period of 20 years from January 1. You are required to prepare the royalty account. Shortworking recouped in Rs. On 1st January
Study Note 2.1 Page (60-79)
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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 b c For the extraction of oil, coal, and minerals from the ground To an author for sale of his books. 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.
BCOM 1st Year Royalties Accounts Long Question Answer Study Material Notes · 1. When royalty is payable: Royalty A/C Dr. To Landlord A/C · 2. For writing off.
Accounting Problems on Royalties
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Very nice article and clear also. Get notes here of Financial accounting. Discover a step-by-step process to running the accounts for your investment club" ….
Royalty is payable by a user to the owner of the property or something on which an owner has some special rights. A royalty agreement is prepared between the owner and the user of such property or rights. If payment is made to purchase the right or property that will be treated as capital expenditure instead of a Royalty.
In this article we will discuss about the top five accounting problems on Royalties with their relevant solutions. Collieries Co. The company closes its books of account on 31st March every year.
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