21 Royalty Accounts

O Introduction
There are some special rights over something which are possessed
landlordpossesses an exclusiveright over some property say mine by some persons. For example, a
has invented something new has an exclusive right over his patent rights. An in his land A patentee who
or quarry
author has an exclusive copy-
right over the work or his writing in the form of a book. These rights either can be used by these persons
themselvesor can be given to some other person on lease basis for some consideration. If the second option
is adopted, there comes into existence a royalty agreement. A royalty agreement is an agreement between
twoparties, i.e., the person who gives out his special rights and the person who takes out the special right
on lease for a consideration. The person who gives out some special right over something to another person
for a considerationis called lessor or landlord orpatentee or an author. The person who takes out some
specialright from its owner on lease for a consideration is called lessee or tenet or patentor or publisher.

O Terms used in Royalty Agreements

There are some special terms which generally are used in royalty agreements. The meaning
of such terms must be clear to the reader. The special terms are :
(i) Landlord. The person who gives out his some special rights over something say mining rights or
patent rights or copy rights, on lease to another person for a consideration is called the landlord, or lessor or
patentee or an author.
(ii) Lessee. The person who takes out the special rights from its owner on lease for a consideration is
called lessee or patentor or publisher.
(iii) Royalty. Royalty is a periodical payment based on output or sale for the use of a certain asset or
right like mine, copyright or patent to its owner. Thus, royalty is paid by the lessee of a mine to the owner
of the mine, by the manufacturer to the patentee or by the publisher to the author of the book. Royalty is
also paid by concerns dealing in raising of earth, clay stone or by concerns engaged in collection of forest
products as lac, honey, etc. to the landlord or the Government from whom lease has been taken to continue
their activities.
Types of Royalties. There are three types of royalties (i) Mining royalty, (ii) Patent royalty,
and (iii) Copyright royalty.
Mining Royalty is the periodical payment generally based on output, made by the lessee of a mine or
quarry to the lessor or the landlord (i.e., owner of the mine or quarry).
Patent Royalty is the periodicalpayment based on output, made by the lessee of a patent or patent
right to be lessor or the patentee (i.e., the holder of the patent right).
Copyright Royalty is also the periodical payment based on sales, made by the lessee of a copyright
(i.e., the publisher) to the lessor (i.e., the author).
The bases on which royalty is calculated in various cases are given below :
(a) Author of a book—No. of books sold.
 21.2
ROYALTYACCOO

(b) Owner of a mine—Quantity of coal produced.

(c) Scientist holding patent—Output.
a
(d) An owner of an oil well—Quantity of oil extracted,
business expenditure and debit8Royalty
'The lessee making
the of royalty treats it as ordinary
Account. Thus, Royalty Account is a nominal account and is closed at the end of every accountingyear
payment
transferring it to Profit and Loss Account.Strictly speaking, royalty based on output ig a part of by
production and as such should be transferred CoTrading or Manufacturing or Production Account. Of
based on sales is a selling expenditure and as such should be transferred to Profit and LogsAccount'royalty
It may be remembered that a lump-sum payment for the outright purchase Ofa patent,
or book is not treated as royalty but is a capital expenditure and recorded as a fixed asset. ne
(iv) Minimum (or Dead or Certain or Fixed) Rent. Royaltyagreements are U8ually
whatever be
with a clause that the lessor or landlord must receive a minimum amount 'the producti
sales in a particular period. Such minimum amount is known as minimum rent or dead rent or fixed Or
The fixation of such rent is in the interest of the landlord because it guarantees him the receiptofthe
minimum amount in case of low output or sales. Further, it gives incentive to the lessee to increasethe
production or sales. Since the guarantee is for the payment of a minimum amount, it has the effect
paying actual royalty based on output or sales or minimum rent, whichever is higher. In the absenceof
minimum rent, the lessee may acquire rights from different landlords to obviate competitionand of
deliberately may under-utilise such rights. For example, M/S. Kalyani Publishers printed a book
Advanced Accountancyat a minimum rent of per annum royalty being payable @ 75 percopy on
sold and the number of copiessold in the first year is 2,000and in the second year is In thigcase
M/S. Kalyani Publishers will have to pay 2,00,000(i.e., minimum rent) to the authors in the first year
even though the royalty works out to be 1,50,000for 2,000 copies @ 75 per copy sold. In the secondyear
as royalty for 4,000 copies @ 75 per copy sold will be paid to the authors even thoughthe
minimum rent is
(v) Shortworkings. The excess of minimum rent over actual royalty calculated on the basis ofoutput
or sales is termed as shortworking.In the examplecited above, there is a shortworkingof 50,000,i.e.,
minimum rent—e actual royalty for 2,000 copies @ 75 per copy in the first year. There
is no shortworking in the second year because actual royalty of is more than the minimumrent
Of Normally shortworkings are during gestation period or due to abnormal working conditions
during the early periods of lease as the activity level is low in that period.
(vi) Ground (or Surface) Rent. It is the fixed yearly or half yearly rent payable by the lesseeto the
landlord in addition to the minimumrent.
(vii) Right of Recouping Shortworkings. Usuallyin the first few years of the royalty agreement,
the work does not gather the required momentum because of the time taken in the preparation for starting
the production or pushing up the sales, so shortworkingsarising in the first few years may not be dueto
inefficiency of the lessee. Keeping this in view, royalty agreement may contain a clause that shortworkings
(i.e., excess amount paid in earlier years) are recoverable by the lessee in subsequent years when royalties
are in excess of the minimum rent. The right of getting back the excess payment made by the lesseein
earlier years is called the right of recoupmentof shortworkings.The right of recoupment of shortworkings
can be :
(a) Restricted (i.e., fixed) 'to a certain period, or
(b) Unrestricted (i.e., floating).
When the lessee gets the right of recoupment of shortworkings for a certain period (say four or five
years) commencingfrom the date of the royalty agreement, the right is said to be restricted or fixed.Any
shortworking arising beyond this period cannot be reimbursed.But when the lessor allows the lesseeto
recoup any shortworkingwithin two or three subsequent or followingyears, then the right is said to be
unrestricted or floating because this can be availed of in any year when shortworking arises.
Shortworkings should be carried forward and shown on the assets side in the Balance Sheet so longas
they are recoverable and shortworkings which could not be recouped during the allowed periodOf
recoupment should be closed by transferring to the Profit and Loss Account. If there is no provision in
the royalty agreement for recoupment of shortworkings, the same should be transferred to the
Profit and Loss Account in the very year of the shortworkings.
i,

ACCOUNTS 21-3

shortworking• or its recoupmentdoe. not arise if the royalty agreement

The problem of clause
does not containor sales. of minimum rent. In such a case, the payment of royalty is simply
a
output
Itøsed on
Recoupment of Shortworkings. It means the recoveryof shortworkings of the prevtous years
of subsequent years; Followingconditions can be there for recoupment of
out of gurplus royalty
:
short workings
The shortworkings are recouped when there ig surplus i.e., excess of royalty over minimum rent.
(b) The recoupment of shortworkings is to be done within the agreed period as given in the agreemene
(c) If shortworkings could not be recouped within the agreed period, it will be transferred to Profit &
Loss Account in the year in which the right of recoupment is lost. By this process. shortworkings
account gets closed and will not appear as an asset in the balance sheet.
The journal entries to be passed in the books of lessee and lessor are given alongwith other journal
royalties are recouped and not recouped within stipulated time.
entries in case the
(viii) Surplus. It indicates the excessof actual amount of royalty over minimum rent.
Surplus = Actual Royalty —Minimum Rent.
Shortworkings can be recouped only when the lessee has a right to recoup and there is a surplue

O Distinction Between Rent and Royalty

Followingare the main distinctions between rent and royalty :
Rent Royalty

'I. Nature of Assets It is the considerationpayable for the use It is the considerationpayable for the use
of only tangible assets as building, of special right for both tangible and
machinery etc. intangible assets. (i.e., patents, copy-
rights etc.)
2. Basis of It is mostly payable on the basis of time as It is paid on the basis of production.
payment weekly, monthlyor yearly. or sale.
3. Fixed or Variable The amount of rent is generally fixed with The amountof royalty is variable and is
regard to time. calculated in accordance with production
or sales.
4. Minimum Rent There is no concept of minimumrent. It generallycontains a clause in the
agreement to pay minimum rent.
5. Parties The parties are known as tenant and The parties are known as lessee/
landlord. patentee/publisherand lessor/ patent
holder/authoretc.

O Accounting Entries in the Books of the Lessee

(I) When there are no royalties in a year
(a) If Minimum Rent is not opened
Shortworkings A/c
To Landlord's A/c
(b) If Minimum Rent is opened
(a) Minimum Rent A/c
To Landlord NC
(b) Shortworkings A/c
To Minimum Rent A/c
(c) Landlord Dr. (with the amount of minimum rent paid)
To Bank
 21.4 ROYALTYACC

the actual amount of royalties trans

(d) Profit and Loss or Production Account Dr. (with ferredj
To Royalties Account
(Il) When royalties are less than the minimumrent and shortworkings are recoverable
subsequent years :
If Minimum Rent or Dead Rent Account is not Opened
(a) Royalties Account Dr. (with the actual amount of royalties earned)
Dr. (with the difference between the minimum
Shortworkings Account royalties earned) rent
and the actual
To Landlord (with the minimum rent)
Entries for the payment to landlord and for transfer of royalties to Profit and Loss Account will bethe
same as in (i) discussed afterwards.
The debit balance of the Shortworking Account will be carried forward and shown as an asset in the
Balance Sheet till it is recoupable.
If Minimum Rent or Dead Rent Account is Opened in the Books
(a) Minimum Rent Account Dr.
To Landlord
(Being minimum rent payable to the landlord)
(b) Royalties Account Dr.
Shortwokings Account
To Minimum Rent Account
(Being actual amount of royalties earned and excess amount payable to the landlord debitedto
Shortworkings Account to make up the amount of minimum rent).
(c) Landlord
TOBank
(Being the amount of minimum rent paid)
(d) Profit and Loss Account or Production Account Dr.
To Royalties Account
(Being actual amount of royalties transferred)
The only difference in two methods is that entry (a) in the first method requires two entries (a) and
(b) in the second method, other entries being same.
(111)When royalties are equal to minimum rent in a year
As there will be no shortworkings, no minimum rent account is opened. So, the entry for the amount
payable to the landlord will be
Royalties A/c
'To Landlord A/c
Other entries will be the same as in case of (ii) above.
(IV) When royalties exceed the minimum rent and shortworkings are recouped •
(a) Royalties Account
To Landlord
(Being the amount of royalties earned by the landlord)
(b) Landlord Dr: (with actual royalties earned)
'To Shortworkings (with the amount which can be recouped)
To Bank Account (with the amount paid)
 ACCOUNTS

profit and Logs or Dr.

production Account
To Royalties Account
Being actual royalties earned transferred to the Profit and &eountj
Entries (a) and (b) can algo be shown as follo«s •
Account Dr. (with actual royalties earned)
uga Royalties
Shortworkingg Account
To (with the amount which can
To Landlord (with the difference/
Dr.
(b) Landlord
To Bank Account
(Being amount paid to the landlord)
recoupable •houLdbe
The debit balance (if any) in the ShortworkingsAccountwhich is no longer
profit and Loss Account as follows :
written off to
Profit and Loss Account
To Shortworkings Account
(Being transfer of irrecoverable shortworkings)
Coal Limned
1. (Whenroyalty is to be recouped within fixed period). Bengalof
ILLUSTRATION 1 —r ton
January, 2014at a minimum rent of 15,000merging into a royalty ?
leased a colliery on 1st shortworkjngs over the first three yean orthe lease. The output for the journal
a stipulation to recoup tons respectively.Draft the necessary
years of the lease was 8,000 ; 13,000; 21,000and 18,000
of the company giving effect to the above
entries in the books
s0LUTION
ANALYTICALTABLE
Paz
Output
(Tons) per ton workings SurWus
Year

8.000 8.000
2014
—8.000)
2015 13.000 13,000 2000(15.ooo
13,000) 15.000
21 ,ooo 21 ,ooo 6.000
2016 6.000)
15,WO)
18,000 18,000 3.000<18.000
2017
- 15.000)
JOURNAL ENTRIES IN THE BOOKS OF BENGAL COAL LTD.
2014 Dr.
Dec. 31 Royalties Account
ShortworkingsAccount Dr.
To Landlord
15.n
(Being royalties @ 1 per ton on 8.000 tons and shortworkings
7,000 due to make the minimumamount of 1500)
Dr. 15,000
31 Landlord
To Bank Account
(Being the payment of minimumrent)
Dec. 31 Production Account
To Royalties Account
(Being transfer of actual royalties to
 ROYALTY
21-6
Dr. 13.000
2015 Royalties Account 2,000
Dec. 31 Shortworkinqs Account 15,000
subject to a minimum
(Being royalties @ per ton on 13,000 tons
rent of 15.000) 15.000
Dec. 31 Landlord 15,000
To Bank Account
(Being the payment of minimum rent) Dr. 13,000
Production Account 13.000
To Royalties Account
(Being transfer ot royalties) 21,000
2016 Royalties Account 21,000
Dec. 31 To Landlord
(Being royalties @ per ton on 21 ,000 tons) 21 ,ooo
Dr.
31 Landlord 6.000
To Shortworkings Account
27,000
To Bank Account 6.000
(Being minimum rent of 15,000 paid to the landlord and
shortworkings recouped)
21 ,ooo
31 Production Account
To Royalties Account 21,000
(Being transfer of royalties for the year)
31 Profitand Loss Account Dr. 3,000
To Shortworkings Account 3,000
(Being transfer of irrecoverable shortworkings)
2017
Dec. 31 Royalties Account Dr. 18,000
To Landlord 18,000
(Being royalties due @ I per ton on 18,000 tons)
Dec. 31 Landlord Dr. 18,000
To Bank Account 18,000
(Being payment of royalties)
31 Production Account Dr. 18,000
To Royalties Account 18,000
(Being transfer of royalties to Profit and Loss A/c)
ILLUSTRATION 2. (Whenthere is special condition for recoupment of shortworkings). Mohan took a
mine on lease for 20 years. Rate of royalty is 1 per ton. Minimum rent is 8,000 per year. Next year
shortworkings of that year will not be recouped in which yield will be less than 4,000 tons and the year in
which royalty will be more than minimum rent, only 50% of excess will be used for recoupment of
shortworkings.
Prepare the NecessaryAccounts in the books of lessee when the yield for first four years respectively is
3,500 tons, 7,000 tons, 7,500 tons and 9,000 tons.
SOLUTION ANALYTICAL TABLE
Short- Short- Paid to
Output mum work- workings workings Landlord
Year (tons) Ior ton Rent ings Surplus recouped not recouped

3,500 3,500 8,000 4,500 (1) 4,500 8,000

7,000 7,000 8,000 1,000
7,500 7,500 8,000 500
8,000
1,000 8,000
9,000 9,000 8,000 1,000 500 8,500
 ACCOUNTS
ROYALTY
21-7
snortworking of year cannot be recouped
non
thig 9h0dworking has become non•recoupable because outputof
in year 1. year io less than 4,000 tons,
In the Books
of Lessee
(Mohan)
ROYALTIES ACCOUNT
year
To Landlord A/c Year
3.500
To Landlord A/c 3.500
7.000
To Landlord A/c ByProfit& Log A/c 7.000
7,500 By Prom
To Landlord A/c 7soo
9,000 By Profit&
SHORTWORKINGS ACCOUNT
Year
To Landlord A/c
4,500 1 ByProfit
To Landlord A/c A/c 4300
1.000 Il By Balance c/d 1000
To Balance b/d
1,000 Loss A/c
To Landlord A/c
By Balance cid
1,500 190
To Balance b/d 500 By A/c
LANDLORD ACCOUNT
Year Year
To Bank A/c 8,000 By Royalties A/c 390
By Shortworkings A/c 4,5Ø
8.000
11 To Bank A/c 8,000 By Royalties A/c
By Shortworkings A/c 1.000
8.000 8,000
Ill To Bank A/c 8,000 Ill By Royalties AJc 7.5m
By ShortworkingsAJc
8,000 8,000
IV To Shortworkings AIC 500 IV By Royalties AIC 9,om
To Bank A/c 8.500
9,000 9.000

PROFIT & LOSS ACCOUNT

Year Year
To Royalties A/c 3.500
To Shortworkings A/c 4,500
Il To Royalties A/c 7,000
Ill To Royalties A/c 7,500
To Shortworkings A/c 1,000
IV To Royalties A/c 9,000

ILLUSTRATION 3. (Whenamount of shortworkings or surplus or royalty is given). The Bharat

Mining Company holds a lease of a coal mine for a period of 20 years, commencing from 1st April, 2012. The
 21•8
ROYALTYACC
loose provided for the payment
produced in the previous on 15th April, 2013 and (annually thereafter) a royalty of? 2 per ton
recouped year subject to a minimum rent of 8,000 per year. Shortworkings
out of royalty next two years only. In the year
mimmum rent was to in excess of the minimum rent for theproportionately having
stoppage. The first year in respect of which minimum rent was payable expired on regard
be regarded as having been reduced to the lengtthe
318t March, 2013 h
excess paid for the first year was 3,750, of the second year 3.000. In the third year the
3,200 and of the fourth
sixth year 7,500 only. year 4.000.In the fifth year actual royalties strike amounted to 14,000and in a'
During the Sixth year there was a stoppage due to lasting three months the
Write up the Necessary Accounts in the books of Bharat Mining Company.
SOLUTION
ANALYTICALTABLE
Minimum Short- Recoup- Unrecoup- Paid to
Year Royalty Rent able
workings Surplus able landlord
2013 4,250 8,000
2014 3,750 8,000
5,000 8,000 3,000
2015 f 1.200 8,000
8,000 3.200 3,200 550
2016 -12,000 8,000 8.000
2017 4.000 3,000 9,000
14,000 8,000 6,000
2018 7.500 14.000
6,000 1,500 7,500
ROYALTIES ACCOUNT
2013
Mar. 31 To Landlord 2013
4,250 Mar.31 By Production A/c
4.250
2014
Mar. 31 2014
Landlord 5,000 Mar. 31 Production A/c
2015 5,000
Mar. 31 2015
Landlord 11,200 Mar.31 Production A/c
2016 11.200
Mar. 31 2016
Landlord 12.000 Mar. 31 Production A/c 12,000
2017
Mar. 31 2017
Landlord 14.000 Mar. 31 Production A/c 14,000
2018
Mar. 31 2018
Landlord 7,500 Mar. 31 Production A/c 7,500
SHORTWORKINGS ACCOUNT
2013
Mar. 31 2013
TO Landlord 3,750 Mar. 31 By Balance c/d 3,750
2013
Apr. 1 Balance b/d
2014 3,750
Mar. 31 2014
Landlord 3,000 Mar. 31 Balance c/d 6,750
6,750
2014 6,750
April 1 2015
Balance b/d 6,750 Mar. 31 Landlord 3,200
Mar. 31 Profitand Loss A/c
Mar. 31 Balance c/d 3,000
6,750
2015 6,750
2016
Apr. 1 Balance b/d 3,000 Mar. 31 Landlord 3,000
 ACCOUNTS 21 •9
RO
LANDLORD
2013 2013
Mar. 31
To Balance c/d 8,000 Mar. 31 By RoyaRy 4250
31 Stvtworkings A/c 3.750
8.000 e.om
Bank Account 8,000 Apr. 1
Apr. 15 Balance b/d 8.000
2014 2014
Mar. 31
Balance cid 8.000 Mar. 31 Royalties Account 5.0m
Shortworkinqs AIC 3.000
16.000 16.000
Apr. 15 To Bank Account B,OØ Apr. 1 By Balance bid 8.000
2015 2015
Shortworkings A/c 3.200 Mar. 31 11.2m
Mar. 31 RoyafOes Account
• 31 Balance cid 8.000
19.200 19.2Ø

Apr. 15 Bank Account 8,000 Apr. 1 Balance b/d 8,000

2016 2016
Mar. 31 Shortworkings A/c 3.000 Mar. 31 Royalties
Acotnt 12."
31 Balance cid 9,000
20,000 20,000

Apr, 15 Bank Account 9.000 Apr. 1 Balance b/d

2017 2017
Mar. 31 Balance c/d Mar. 31 Royalties Account '4000
23.000 23.000

Apr. 15 Bank Account 14,000 Apr. f Balance b/d

2018 2018
Mar. 31 Balance cid 7,500 Mar. 31 Royalties Account 75m
21.500 21 *500

Apr. 15 Bank Account 7,500 Apr- I Balance b/d

O Payment of Nazrana or Lease Premium in Addition to Royalty

In some cases, the lessee may agree to pay lumsum amount to the lessor in addition to royalty. This
extra payment in addition to royalty is known as nazrana or lease premium or goodwill.Under such a
situation a Nazrana Account is opened in the books of the lessee and lessor. In the books of the lessæ. the
whole amount of nazrana is debited to 'Nazrana Account', This account being a capital expenditure for the
lessee, can be written off every year during the period of the lease by debiting Profit and Loss Account and
crediting Nazrana Account. In the books of the lessor the amount received as nazrana is credited to Nazrana
Account and equal amount is credited to Profit and Loss Account each year during the life of lease. The
balance in Nazrana Account is shown as an asset (in lessee's books)and as liability (in the of the
lessor.)-
ILLUSTRATION 4. (Payment of Nazrana). On January 1, 2015,a Brick Co. acquired a of 15
years from Mr. X on lease for getting earth. Terms of lease are :
(a) annual rate of royalty is 1 per 100 cubic feet of earth taken out.
'1•10
annum.
(b) minimum rent is 12,000per to X for nazrana.
2015, company gave
(c) on 1st January, first 4 years only.
(d) short workings can be recouped during each year.
December,
(e) annual royalty is paid on 31st in the following manner
:
Brick making company extracted earth 2017 2018
2015
Years
Earth in cubic feet books of Brick Co.
Account and Shortworkings Account in the
Open Nazrana Account, Royalty
SOLUTION
ANALYTICALTABLE
Short Short- Amount
Year Earth Royalties Short-
workings workings paid to
(Cu. feet) workings
recouped unrecouped

2,000 12,000
2015 10,000
15,000 2,000 13,000
2016 12,000
2017 9,000 3,000
14,000 2,000 1,000 12,000
2018
Dr. NAZRANA ACCOUNT cr.

2015 2015
Jan. 1 To Bank A/c Dec. 31 By Profit & Loss A/c
1
x ISO,ooo 10,n
B Balance c/d 1,401"

2016 2016
Jan. 1 To Balance b/d Dec. 31 By Profit & Loss A/c 10,000
By Balance c/d
140,000
2017 2017
Jan. 1 To Balance b/d Dec. 31 By Profit & Loss A/c 10,000
By Balance c/d 1,20.ooo

2018 2018
Jan. 1 To Balance b/d Dec. 31 By Profit& Loss Alc 10,n
By balance c/d

Dr. ROYALTY ACCOUNT cr.

2015 To Landlord 10,000 2015 By Production A/c 10,000

2016 To Landlord 15,000 2016 By Production A/c 15.000
2017 To Landlord 9,000 2017 By Production A/c 9,000
2018 To Landlord 14,000 2018
By Production A/c 14,000
ROYALTYACCOUNTS
21-10
SHORTWORKINGS ACCOUNT Cr.

2015 To Landlord 2,000 2015 By Balance cld 2,000

2016 To Balance b/d 2,000 2016 By Landlord 2.000
2017 To Landlord 3,000 2017 By Balance c/d 3,000
2018 To Balance b/d 3.000 2018 By Landlord 2,000
By Profit& Loss Alc 1.000
3.000 3,000

O Stoppageof Work due to Strike/Lockout/Accidentetc.

Generally minimum rent is fixed taking into consideration the minimum expected
output under
conditions. Whenever there is stoppage of work due to abnormal reasons as strike, lockout, accidentnormal
or for
any other reason, the minimum rent is required to be adjusted as provided for in the agreement. Such
agreement may have the following arrangements :
(i) Non-application of the condition of minimum rent. In such a case the clause of minimum rent
is not applied. Actual royalties will discharge all rental obligations. There will not be any shortworkings or
surplus.
(ii) Reduction in the amount of minimum rent. If there is any clause in the agreement, regarding
reduction in the amount of minimum rent, it can take the following form •
(a) Minimum rent is reduced proportionately to the length of the stoppage of work during the relevant
year.
(b) Minimum rent can be reduced by a fixed percentage or by a fixed amount in the year of stoppage.
ILLUSTRATION 5. (Whenminimum rent is reduced proportionately in case of strike) Mr.
Sharma took a lease of Mines from Mr. Singhania with effect from 1st January 2003 for a period of 20
years. The terms of agreement provided for the payment of royalty @ 0.60 per ton raised, subject to a
minimumrent of 12,000per annum, with a right to recoup shortworkings,within a period of 3 years
immediatelysucceedingthe year in which the short-workingarises. It was further agreed that the
minimum rent should be reduced proportionately, in case of strikes or lock-outs in any year.
You are furnished with the following details •
Year 2012 2013 2014 2015 2016 2017
Tons raised 23000 18700 15400 19000 20600 22600
(there was a strike period
of 3 months)
The balance in Shortworkings Account as on January I, 2012 was 4,900 of which 2,200 arose in
2010 and the balance in 2011.
You are required to show Royalty Account, Shortworkings A/c and Mr. Singhania's A/c in the Books of
Mr. Sharma for all the above 6 years. (ICWA Final)
SOLUTION ANALYTICALTABLE
Year Tons Royalty Minimum Short- Surplus Recouped Paid to
raised @ 60 p. Rent Recouped Landlord

2012 23,000 13,800 12,000 1.800 1,800 12.000

2013 18,700 11 ,220 12.000 780 2700 12.000
2014 15,400 9,240 9,000 240 240 9.000
2015 19,000 1 1 ,400 12.000 12,000
2016 20,600 12,360 12,000 360 180 12.000
2017 22,600 13,560 12,000 1,560 12.960
ROYALTY ACCOUNT

31-12-2012To Singhania's A/c 13.800 31-12-2012 By ProductionAic 13,800

 ROYALTY ACC
21•12
AIC
11,220 31-12-2013 By Production 11,2a
31-12-2013 To Singhania's A/c At
9,240 31-12-2014 By Production c
31-12-2014 To Singhania's A/c
9,240
A/c
11.400 31-12-2015 By Production 11,400
31-12-2015 To Singhania•s A/c A/c
12,360 31-12-2016 By Production
31-12-2016 To Singhania's Alc
12,360

13,560 31-12-2017 By Production AJc 13,560

31-12-2017 To Singhania's A/c
SHORT WORKINGS ACCOUNT

1-1-2012 To Balance b/d 4,900 31-12-2012 By Singhania's A/c

By Profit & Loss A/c
By Balance c/d 2,700
4,900 4900

1-1-2013 To Balance b/d 2,700 31-12-2013 By Profit& Loss A/c 2,700

31-12-2013 To Singhania's Alc 780 By Balance c/d 780
3,480 3,480

1-1-2014 To Balance b/d 780 31-12-2014 By Singhania's AJc 240

By Balance c/d 540
780 780

1-1-2015 To Balance b/d 540 31-12-2015 By Balance c/d 1,140

31-12-2015 To Singhania's A/c
1,140 1,140

1-1-2016 To Balance b/d 1,140 31-12-2016 By Singhania's AIC 360

By Profit & Loss A/c 180
By Balance cid
1.140 1,140
1-1-2017 To Balance b/d 600 31-12-2017 By Singhania's A/c
SINGHANIA'S ACCOUNT

31-12-2012 To ShortworkingsAlc 1.800 31-12-2012 By Royalty AJc 13,800

To Bank A/c 12000
13.800 13,800
31-12-2013 To Bank A/c 12,000 31-12-2013 By Royalty AIC 1120
31-12-2013 By Shortworkings AJc 780
12,000 12,000
31-12-2014 To ShortworkingsAlc 240 31-12-2014 By Royalty A/c 9240
To Bank A/c 9,000
9,240 9,240
31-12-2015 To Bank A/c 12,000 31-12-2013 By RoyaltyAlc 11,400
31-12-2013 By Shortworkings A/c
12,000 12.000
31-12-2016 To ShortworkingsAJc 360 31-12-2016 By Royalty A/c 12.360
To Bank A/c 12,000
12,360 12.360
31-12-2017 To ShortworkingsA/c 600 31-12-2017 By Royalty A/c 13.560
To Bank A/c 12,960
13.560 13,560
ROYALTYACCOUNTS 2+13

O Creation of Provision Against Shortworkings

Sometimes, it may not be possible to recoup the shortworkings out of future payments of royalty due to
some factors physical or economical even though the period to recover the same still has not lapsed. In such
cases, provisionagainst shortworkings should be created in the year in which shortworkings arise with the
amount of shortworkings of that year by passing the following entry:
Profit and Loss Account Dr.
To Provision Against Shortworkings Account
(Being provision against shortworkings created)
When shortworkingsare actually recovered,the balance in the Provision Against Shortworkings
Accountshould be reduced by transfer to the Profit and Loss Account by passing the following entry :
Provision Against Shortworkings Account Dr.
To Profit and Loss Account
(Being recoupment of shortworkings)
In case it is clear that shortworkings are no longer recoupable, the followingentry is to be passed
Provision Against Shortworkings Account Dr.
To Shortworkings Account
(Being provision against shortworkings eliminated on account of irrecoverable shortworkings)
After shortworkings are recouped, the excess provision against shortworkings is credited to Profit and
Loss Accountas a prior period adjustment because Profit & Loss Account was debited when provision
against shortworkings was created. Entry for excess provision is :
Provision Against Shortworkings Account
To Profit & Loss Account
(Being transfer of excess provision after shortworkings are recouped)
The above method of creation of provision against shortworkingsis adopted when the amount of
shortworkings is substantial and chances of recovery of shortworkings are uncertain.
ILLUSTRATION 6. (Whenprovision against shortworkings is to be maintained) Mining Corporation
Ltd. obtained a lease of coal field for 99 years from Mr. Landlord on following terms from 1st January, 2015.
(a) Mining Corporation will develop the land and will bear the cost of development.
(b) Royalties will be 2 per tonne of coal raised during the period.
(c) Minimumrent will be 10,000for the first year with an annual increase Ofe 1,000till it reaches
15,000.
(d) Shortworkings,if any, are recoverablewithin first three years only. Mining Corporation Ltd.
developedthe land at the cost of 2 crores and estimated coal deposit of 20 lakhs of tonnes. It was decided
to depreciate this expenditure on Depletion Method of depreciation.
The coal raised by Mining Corporation is as under :
Year 2015 2016 2017 2018
Production in tonneg 1,000 2,000 10,000 15,000
You are required to prepare : Royalties Account, Shortworkings Account, Landlord Account and
ProvisionAgainst Shortworkings Account.
SOLUTION
ANALYTICALTABLE

Royalty workings Payment

Produc- per ton mum work- Recoup- not to
Year tion Royalty Rent ings Surplus ment recoupable Landlord
Tonnes
2015 1,000 2 2.000 10.000 8,000 10.000
2016 2,000 2 4,000 11,000 7.000 11,000
 ROYALTY АССОИМТ$
21-14

20000 12.000 в,ооо в.ооо 7,000 12.000

2017 10,000 2
17.ooo 30,000
2018 15,000 2 30,000 13,000
the ВооКз of Mlnlng Corporation Ltd.
ROYALTIES АССОИГЧТ

2015 Ву Production Alc 2.000

2015 то Landlord А,'с 2,000
4,000 2016 Ву Productbn АЈс 4.000
2016 то Landlord аЈс
2017 То $hortwork'nqsМс в,ооо 2017 Ву Productbn АЈс 20,000
То LandbtdМс 12,000
20.000 20,000

Ву Productbn A.lc зо.ооо

2018 То Landlotd Мс 30,000 2018

SHORTWORklNGS АССОИНТ

2015 То l-andlord А.[с в,ооо 2015 Ву Ва1апсеcld 8,000

2016 То Balance t)/d в,ооо 2016 Ву Balance cld 15,000

То Landlord АК: 7,000
15,000 15.ооо
2017 То Balance b/d 15,000 2017 Ву RoyaIties 8,000
Ву Provision Against
Shortworkings 7,000
15,000 15,000

(ДНОИОЯО АССОИНТ

2015 то вапк мс 10,000 2015 Ву RoyaltiesТс 2,000

Ву Shortworkings Alc в,ооо
10,000 10,000
2016 То ВапК Аје 11.000 2016 Ву Royaltiesмс 4,000
Ву Shortworklngs АК: 7.000
лл,ооо 11,000
2017 То ВапК Мс 12.ооо 2017 Ву Royalt\esМс 12.000
2ШВ То ВапКAlc 30,000 2018 Ву RoyaltiesМс 30,000

PAOVlSION AGAINST SHORTWORklNGS ACCOUNT

2015 То Balance cjd 8,000 2015 Ву Profit & toss Alc 8,000
2016 То Ва'апсест 15.000 2016 Ву Ва\апсе b/d 8,000
Ву Protit & t-oss Мс 7.000
15,000 15,000
2017 То Profit & АЈс в,ооо 2017 Ву Balance b/d 15,000
То Shortwork[nqs АЈс 7,000
15,000 15.000
ROYALTY ACCOUNTS 21•15

Note. Cost of the development of land 2 crores is not to be considered as its is a capital expenditure. It
has nothing'to do with royalty accounts. Cost of 2 crores will be recovered from productionby way of
depreciation by following depletion method of depreciation as given below •
Cost of the Development of the Land 2 crores
Depreciation per tonne = Quantity of Estimated 10
Coal Deposit 20 lakhs tonnes
Every year Production Account will be charged depreciation @ 10 per tonne of output produced.
ILLUSTRATION 7. (Whenminimum rent is reduced (i) on proportionate basis in case or
strike and (ii) certain percentage of the period of lockout) New Steel Ltd. obtained a lease from Old
Coal Ltd., for a coal mine on 1st January, 2012 on the following terms and conditions :
(1) Royalty at 1 per tonne raised.
(2) Minimum rent 24,000 per annum.
(3) Recoupmentof shortworking of each year during three years followingsubject to a maximum of
5,000p.a.
(4) In the event of strike the minimum rent would be taken pro rata on the basis of actual working
days but in the event of lockout, the lessee would enjoy a concession in respect of minimum rent for of
the period of lockout.
Besides the above, New Steel Ltd. have been granted a cash subsidy equal to 25% of the unrecoupable
shortworkings by the Central Government up to the first five years of the lease.
Working up to first six years is as follows :

Year 2012 2013 2014 2015 2016 2017

Actual Royalty (t) 14,000 20,400 32,200 27 ,200 21,600 19,400
(Strike 2 months) (Lockout for 4 months)
Show the ledger accounts in the books of New Steel Ltd.
SOLUTION
ROYALTY ACCOUNT
2012 2012
Dec. 31 To Old Coal Ltd. 14,000 Dec. 31 By Production
NC 14.000
2013 2013
Dec. 31 To Old Coal Ltd. 20,400 Dec. 31 By Production A/c 20.400
2014 2014
Dec. 31 To Old Coal Ltd. 32,200 Dec. 31 By ProductionAlc 32.200
2015 2015
Dec. 31 To Old Coal Ltd. 27,200 Dec. 31 By Production A/c 27,200
2016 2016
Dec. 31 To Old Coal Ltd. 21.600 Dec. 31 By Production A/c 21 ,600
2017 2017
Dec. 31 To Old Coal Ltd. 19.400 Dec. 31 By Production A/c 19.400

SHORTWORKINGS ACCOUNT
2012 e 2012
Dec. 31 To Old Coal Ltd. 10,000 Dec. 31 By Balance cid
2013 2013
Jan. 1 To Balance b/d 10,000 Dec. 31 By Balance cid 13,600
Dec. 31 Old Coal Ltd. 3.600
13,600 13.600
21-16 ROYALTY ACCOUNTS

2014 2014
Jan. I To Balance b/d 13,600 Dec. 31 By Old Coal Ltd. 5,000
Dec. 31 By Balance c/d 8,600
13,600 13.600
2015 2015
Jan. 1 To Balance b/d 8,600 Dec. 31 By Old Coal Ltd. 3,200
Dec. 31 By Cash (Subsidy)
Dec. 31 (25% of 1 ,800)
Dec. 31 By Profit & Loss A/c 1.350
Dec. 31 By Balance c/d 3,600
8,600 8.600

2016 2016
Jan. 1 To Balance b/d 3,600 Dec. 31 By Old coal Ltd. 1,600
Dec. 31 By Cash (Subsidy),
(25% of 2,000)
Dec- 31 By Profit & Loss A/c 1,500

3,600 3.600

2017 2017
Dec. 31 To Old Coal Ltd. 600 Dec. 31 By Balance c/d
2018
Jan. 1 To Balance b/d 600

OLD COAL LTD.

2012 2012
24,000 Dec. 31 By Royalty A/c 14,000
Dec. 31 To Bank A/c
Dec. 31 By ShortworkingsA/c 10,000
24,000 24,000

2013 2013
Dec. 31 To Bank A/c 24,000 Dec. 31 By Royalty A/c 20.400
By Shortworkings A/c 3,600
24,000 24,000
2014 2014
Dec. 31 To Shortworkings A/c 5,000 Dec. 31 By Royalty A/c 32,200
Dec. 31 To Bank A/c 27200
32,200 32,200

2015 2015
Dec. 31 To Shortworkings A/c 3200 Dec. 31 By Royalty A/c 27,200
Dec. 31 To Bank A/c 24.000
27,200 27,200
2016 2016
Dec. 31 To Shortworkings A/c Dec. 31 By Royalty A/c 21.6@
Dec. 31 To Bank A/c 20,000
21.600 21.600

2017 2017
Dec. 31 TO Bank A/c 20,000 Dec. 31 By Royalty AIC 19.4W
Dec. 31 By Shortwoöqngs AIC 600
20,000 20.000
ROYALTY ACCOUNTS 21-17

O Income Tax
If there is a provision in the income tax law that the payer of royalty should deduct tax at source at the
prescribed rate and tax so deducted shall be deposited to the credit of the Central Government within a
specifiedtime. The landlord will get the amount of royalty or minimum rent after adjustment of tax- The
total amount of royalty (including tax) will be Charged to Profit & Loss (or Production) A/c.
ILLUSTRATION 8. (When deduction of Income Tax is to be made at Source) Agro (India) Ltd.
Madras, entered into a collaboration agreement with Agro (U.K.)Ltd., Birmingham, under which the
former were to pay the latter, commencingwith the date on which they started production, a royalty @5%
of sales during each quarter of the calendar year, subject to deduction of tax in India (which may be
assumed @50%)so however that the remittance in any such quarter should not be less than e 500, the
'shortworking'being recoupable from out of royalty payable in subsequent quarters during the same
calendar year but not beyond.
Following are the sales figures of Agro (India) Ltd. •
Quarter 30-9-2016 31-12-2016 31-3-2017 30-6-2017 30-9-2017 31-12-2017
Sales(0
The production had begun on 1-7-2016,the rate of exchange may be taken at e 1 = 13-1/3for
remittances upto 6-6-2017and thereafter at E = 21. The remittance has been made in each case within
one month from the end of the relevant quarters.
Show Royalty Account, Agro (U.K.) Account and Shortworkings Account.
SOLUTION
ROYALTY ACCOUNT
2016 2016
sep. 30 To Agro (U.K.) Ltd. 5,000 Dec. 31 By Profitand Loss Account 15,000
Dec. 31 To Agro (U.K.) Ltd. 10,000
15,000 15,000
2017 2017
Mar. 31 To Agro (U.K.) Ltd, 25.000 Dec. 31 By Profitand Loss Account 1.31.800
June 30 To Agro (I-JR,) Ltd. 16,800
sep. 30 To Agro (U.K.) Ltd. 30,000
Dec. 31 To Agro (U.K.) Ltd. 60,000
1.31,800 1.31 ,800

SHORTWORKINGSACCOUNT
2016
Sep. 30 To Agro (U.K.) Ltd. 8,333 Dec. 31 By Profit & Loss Alc 11.666
Dec. 31 To Agro (U.K.) Ltd. 3.333
11,666 11,666
2017 2017
June 30 TO Agro (U.K.) Ltd. 4,200 sep. 30 By Agro (U.K.) Ltd. 4.200

AGRO (U.K.) LTD.

2016 2016
Oct. 31 TO Tax Payable AIC 6.667 Sep. 30 By Royalty A/c 5.000
" 31 Bank A/c 6.666 " 30 ShortworkingsAic 8.333
Dec, 31 Balance 13,333 Dec. Royalty A/c 10.000
31 Shortworkings AIC 3.333
26,666 26,666
 21 •18 ROYALTY ACCOUNTS

2017 2017
Jan. 31 To Tax Payable A/c 6.667 Jan. 1 By Balance b/d 13.333
31 Bank A/c 6.666 Mar. 31 Royalty A/c 25,000
April 30 Tax Payable A/c 12,500 June 30 Royalty A/c 16,800
Bank A/c 12,500 " 30 Shortworkings A/c 4.200
July 31 Tax Payable A/c 10500 sep. 30 Royalty A/c 30.000
31 Bank A/c 10,500 Dec. 31 Royalty A/c 60.000
Oct. 31 Shortworkings A/c 4,200
V
' 31 Tax Payable A/c 12,900
Oct. 31 Bank A/c 12.900
Dec. 31 Balance cJd 60,000
1,49.333 1.49,333
2018 2018
Jan. 31 To Tax Payable A/c 30,000 Jan. 31 By Balance b/d 60,000
31 To Bank A/C 30,000
60,000 60.000
Note. The minimumpaymentafter tax up to 30-4-2017 is 6.666 (i.e. 500 @ 13.33 per E). To this an
equal amount is added for tax, therefore, minimum rent is 13.333 (i.e. 1,000 @ 13.33 per C).
The minimum paymentaftertax after 6-6-2017 is 10,500 (i.e. 500 @ 21 per E). To this
amount for tax is added to arrive at the amount of minimum rent. Thus, minimum rent after 6-6-2017 an equal
is 21.000
(i.e. e 10,500 + e 10,500].

O Copyright Royalties
Copyrightmeans the sole right granted by law to an author to publish and sell
The author generally gives this right to a firm of publishers, who will undertake tohis book in the market.
do the production and
sales of the book for a consideration,This consideration may be a lumpsum payment or a fixed
as agreed between the author and the publishers on the number of books sold multiplied percentage
price of the books sold, The number of copies sold can be calculated in the following
by the printed
manner :
No.
Opening Stock of Books
Add : Number of Books Printed

Booksavailable
Less : Specimen Books
Waste Books
Closing Stock of Books

No. of Books Sold during the year

OR
No. of Copies Sold Copies Printed + Opening Stock Closing Stock
Generally copyright agreements do not contain any clause for the
royalty. Hence, the problem of shortworkings, recoupment of shortworkings payment of minimum amountOf
Profit and Loss Account does not arise in such cases. But if there is any or writing off shortworkings to
clause for the payment of minimum
rent, then treatment of shortworkingswill be same as discussed earlier.
ILLUSTRATION 9. (Where no. or copies sold are to be calculated
shortworkings within a fixed period) Mr. Jain wrote a book on Advancedbesides recoupmentof
published with ws Kalyani Publishers on the terms that royalties will be paid @ Accountancy and got it
to a minimum rent of with a right of recoupmentof shortworkings 50 per copy sold subject
over the first three yearsOf
ROYALTYACCOUNTS 21-19

the royalty agreement. From the following details write up (i) Minimum Rent Account, (ii) Royalties
Account, (iii) Shortworkings Account, and (iv) Mr. Jain's Account.
Year 2014 2015 2016
Number of Copies Printed 2,000 3,000 4,000 5,000
Closing Stock 100 200 400
SOLUTION
In this problem,it is necessary to find out the number of copies sold because royalty is to be paid on the
basis of numberof copies sold. Number of copies sold is found out as follows •
Numberof copies sold = Copies printed+ Opening stock —Closing stock
Numberof Copies Royalty
sold in @ e 50
2014 = 2,000 + Nil-IOO = 1,900 copies 95,000
2015 = 3,000 + 100-200 = 2,900 Copies
2016 + 200 —400 = 3,800 Copies e
2017 5,000+400-500 = 4,900 Copies
MINIMUMRENT ACCOUNT
2014 2014
Dec. 31 To Mr.Jain Dec. 31 By Royalties Account 95,000
By Shortworkings A/c 55,000

2015 2015
Dec. 31 To Mr.Jain Dec. 31 By Royalties Account
31 By Shortworkings A/c 5.000

ROYALTIES ACCOUNT
2014 2014
Dec. 31 TO Minimum Rent A/c 95,000 Dec. 31 By Profit& Loss Alc 95,000
2015 2015
Dec. 31 To Minimum Rent A/c 1.45.ooo Dec. 31 By Profit& Loss AJc 1.45.ooo
2016 2016
Dec. 31 To Mr.Jain Dec. 31 By Profit & Loss A/c
t 1.90.ooo
' 31 TO Shortworkings A/c 40,000
1.90,ooo
2017 2017
Dec. 31 TO Mr.Jain 2.45000 Dec. 31 By Profit & Loss A/c

SHORTWORKINGS ACCOUNT
2014 2014
Dec. 31 TO MinimumRent A/c 55,000 Dee 31 By Balance cid 55.000

2015 2015
Jan, I TO Balance b/d 55.000 Dec. 31 By Balance cid 60,000
Dec. 31 MinimumRent A/c 5.000
60.000 60,000
2016 2016
Jan. 1 TO Balance b/d 60,000 Dec. 31 By Royalties Account 40.000
31 Profit & Loss Alc 20.000
60,000 60,000
 21•22 ROYAL ACCOUNTS

KUNDANLAL

2014 To Bank A/c 60,000 2014 By Royalties A/c 30.000

By Shortworkings A/c 30.000
60,000 60.006
2015 To Bank A/c t.oo.ooo 2015 By Royalties A/c 98.000
By Shortworkings A/c 2.000
1 poo,ooo 1.001000

2016 To Bank AJc t,oo.ooo 2016 By Royalties A/c

TO Shortworkings A/c 25.000
1 25.000 1.25,ooo

2017 TO Bank A/c 76.000 2017 By Royalties A/c t.oo.ooo

To Damages Receivable A/c 24,000
00.000

2018 To Bank A/c 1.25,ooo 2018 By Royalties A/c

O Accounting Entries in the Books of the Lessor (or Landlord)

In the books of the lessor (or landlord) receiving the royalties, the treatment will be the reverse
of what we have done so far. Following entries will be recorded
(l) Whenthe royalties received are less than the minimumrent and shortworkings are
recoverable out of future years, tho followingentries are made :
(a) LA'ssee•sAccount Dr. (with minimum rent)
To Royaltiea Receivable Account (with actual royalties)
To Shortworkings (or Royalty)
Suspense Account (with the difference)
(b) Bank Account Dr. (with the amount received)
To Lessee's Account
(c) Royalties Receivable Account Dr. (with the amount of royalties
To Profit & Loss Account earned transferred)
The credit balance of Shortworkings Suspense Account will be carried forward and Shown ag a liability
in the Balance Sheet till it is recoupable.
It is called "Shortworkingsor Royalty Suspense Account" because the extra payment over the actual
royalty that the landlord receives. can be recovered by the lessee from the excess working when the
is more than the minimum rent. The matter of recovery is uncertain which depends on future royalty
which is uncertain. That is why it is called Royal.tyor Shortworkings Suspense. working
(2)When the royalties earned exceed the minimum rent and shortworkings are recovered, Cho
entries are as follows
(a) Lessee's Account Dr. (with the amount of royalties
To Royalties ReceivableAccount earned)
(b) Shortworkmgs Suspense Account Dr. (with the amount of short-
To Lessee's Account workings recovered)
(c) Bank Account Dr. (with the amount due received)
To Lessee's Account
(d' Royalties ReceivableAccount Dr. (with the amount of actual
To Profit and Loss Account royalties earned)
ROYALTYACCOUNTS 21-23

If any balance of Shortworkings Suspense Account is no longer recoverable, it should be transferred to

profit and Loss Account as follows :
Shortworkings Suspense Account
To Profit and Loss Account
ILLUSTRATION 11. (Whereentries are to be made in the books of landlord) Bihar Coal Ltd.
leased a colliery from Himalaya Coal Ltd. on 1st January, 2013 at a minimum rent of? 30,000 merging into
a royalty of 1.50 per ton with power to recoup shortworkings during the first three years of the lease. The
output of the colliery for the five years of the lease was 9,000, 15,000, 27,000, 17,000 and 28.000 tons
respectively.
pass the journal entries for five years for the above transactions in the books of Himalaya Coal I
SOLUTION
ANALYTICAL TABLE
Year Output Royalty Short- Surplus S.W. S.W. not Pad to
(tons) Receivable workings Recouped Recouped Landbrd

2013 30,000
2014 30,000
2015 27,000 40,500 10,500 10.500 13,500 30.000
2016 17,000 25,500 4,500 4.500 30.000
2017 28,000 42,000 12,000 42.000
JOURNAL ENTRIES IN THE BOOKS OF HIMALAYACOAL LTD.
2013
Dec. 31 Bihar Coal Ltd. Dr. 30,000
To Royalties Receivable Account 13.500
To ShortworkingsSuspense Account
(Being the minimumamountdue from Bihar Coal Ltd.—royalties@
1.50 per ton on 9,000 tons and 16,500 treated as shortworkingsto
make up the minimum amount of 30,0iX))
Dec. 31 Bank Account 30,000
To Bihar Coal Ltd. 30.000
(Being the amount of royalties received)
Dec, 31 Royalties Receivable AccoÜnt 13.500
To Profitand Loss Account 13,500
(Being amount of royalties receivable transferred to Profit and Loss
account)
2014
Dec. 31 Bihar coal Ltd. Dr. 30,000
TO Royalties Receivable Account 22.5m
To ShortworkingsSuspense Account 7.5m
(Being minimum amount due from Bihar Coal Ltd.—royalties @ 1 50
per ton on 15,000 tons and 7.500 taken as shortworkingsto make
up the minimumamount of 30,000)
Dec, 31 Bank Account 30,000
To Biharcoal Ltd. 30.000
(Being amount due received trom Bihar Coal Ltd.)
Dec. 31 Royalties Receivable Account 22.500
To Profit and Loss Account 22,500
(Being transfer ot Royalties Receivable Account to Profit and Loss
Account)
 21-24 ROYALTY ACCOUNTS

2015
Dec. 31 Bihar Coal Ltd, 40,500
To Royalties Receivable Account
40,500
(Being royaltiesearned @ 1.50 per ton on 27,000 tons)
Dec. 31 Shortworkings Suspense Account Dr. 10,500
To Bihar Coal Ltd. 10500
(Being Shortworkingssuspense recouped by Bihar Coal Ltd. in
excess of minimum rent)
Dec. 31 Bank Account 30,000
To Bihar Coal ltd. 30.0m
(Being minimumrent received from Bihar Coal Ltd.)
Dec. 31 Royalties Receivable Account 40,500
ShortworkingsSuspense Account Dr. 13,500
To Profitand Loss Account
54,000
(Being transfer of royalties receivable and irrecoverable balance in
Shortworkings Suspense Account to Profit and Loss Account)
2016
Dec. 31 Bihar Coal Ltd. Dr. 30,000
To Royalties Receivable Account
25,500
To ShortworkingsSuspense Account
4,500
(Being minimumrent due from Bihar Coal Ltd.—royalties @ 1.50
per ton on 17,000 tons and shortworkings 4,500 to make up the
minimumrentof 30,000)
Dec. 31 Bank Account Dr. 30.000
To Biharcoal Ltd, 30.000
(Being receipt of minimum rent from Bihar Coal Ltd.)
Dec. 31 Royalties Receivable Account
25,500
Shortworkings Suspense Account Dr. 4.500
To Profitand Loss Account
(Being transfer Of royalties receivable and shortworkings to Profit 30.000
and
Loss Account ; shortworkingscannot be carried forwardbecause it is
recoverable during the first three years of the lease),
2017
Dec, 31 Bihar Coal Ltd. Dr. 42mo
TO Royalties Receivable Account
(Being royaltiesearned @ 1.50 per ton on 28,000 tons) 42,000

Dec. 31 Bank Account

42000
To Biharcoal Ltd.
(Being amount due from Bihar Coal Ltd. received)
42000

Dec. 31 Royalties Receivable Account Dr. 42,000

To Profit and Loss Account
42000
(Being transfer of royalties receivable to Profit and I oss Account)

O Sub-lease
(Or Sub-royalty)
Sometimes,the terms of the original lease may empowerthe lessee to sublet a part of the land to
another person ag a sub-lessee. In such a case, the status of the original lessee will be two fold : as le—ee
paying royalties to the landlord and as sub-lessor receiving royalties from the sub-lessee. As lessee he
maintains Royalties Payable Account,Shortworkings RecoupableAccount and Landlord's Accountand as
ROYALTYACCOUNTS
21 •25

sub-lessor he maintains Royalties Receivable Account, Shortworkings Allowable Account and Sub-lessee's
Account.
The entries in the books of sub-lessee and landlord will be in the lines of those of lessee and
landlord ag
discussed earlier.
A point of importance in case of sub-lease is that production or sales by the
sub-lessee under sub-lease
will be consideredto be productionor sales under the original lease and royalties payable
landlord will be calculated on the basis of total production or sales of both the
to the original
lessee and the sub-lessee.
ILLUSTRATION 12. Cochin Coals Ltd. holds a lease of coal mine for 20
the coal mine to Dhanbad Coals Ltd. The details of output in tons are
years. It sub-leased a part of
given below :
Year Cochin Coals (Tons) Dhanbad Coals (Tons)
2015-16 10,000 4,000
2016-17 12,000 7,000
2017-18 14,000 8,000
As per lease, Cochin Coals has to pay 100 per ton and a minimum rent being
Coals had to pay 120 per ton to Cochin Coals by way of royalty. Dhanbad
Show Royalty Account in the books of Cochin Coals Ltd. for
the said 3 years reflecting both Royalty
receivable from Dhanbad Coals and Royalty payable to the
Landlord. (ICAI•I, Dec., 2015 Modified)
SOLUTION
In the Books of Cochin Coals Ltd.
ROYALTY PAYABLE ACCOUNT
31-3-2016 To LandlordA/c By Royalty Receivable A/c (4,000 x 120)
100 (10,000 + 4,000) 4.80,000
By Profit & Loss A/c
9.20000
14,00.000
31-3-2017 To LandlordA/c By Royalty Receivable AIC (7.000 x 120)
100 (12.000 + 7,000) 8.40.ooo
By Profit & Loss A/c
10,60.ooo
19.00,ooo
31-3-2018 TO Landlord A/c By Royalty Receivable A/c (8,000
100 (14.000 + 8.000)
120) 9.60,000
By Profit & Loss A/c 12.40000
22.00000
Note. There will be shortworkingsof I (i.e. 15,00.000 MinimumRent — 1400.000 Royalty
fot the year 2015-16 and it will be debited to Profit and Payable)
Loss NC of the same year as there is no clause of
recoupment of shortworkings in the agreement.
ILLUSTRATION 13. (Sub-lease) On 1st January, 2014 Hari obtained a mining lease on a term that
on every ton of output a royalty of 50 paise is payable
subject
1st July, 2015, Hari granted a sub-lease of part of this mine to a minimum rent of 12,000 per annum. On
per ton of output merging into a minimum of 5.000 per annum. to Ram on the basis that a royalty of 75 paise
The recoupment of shortworkings was limited under the principal lease to a period of first three years
of lease and under the sub-lease to a period upto 31st
December, 2016.
From the following information you are required to show ledger
accounts in the book of Hari
Outputin tons
Year Own Sub-lease
2014 18.000
2015 16,000 3,000
2016 18.000 9,000
2017 15,000 10,000
SOLUTION (For Analytical Table. please see the nextpage)
 ROYALTY ACCOUNTS
21•26

as
ROYALTYACCOUNTS 21•27

In the Books of Hari

ROYALTY PAYABLE ACCOUNT

31-12.2014To Landlord 9,000 31-12-2014 By Profit & Loss A/c 9.000

31-12.2015To Landlord 9,500 31-12-2015 By Royalty Receivable Alc
(on 3,000 tons @ 50 paise) 1.500
31-12-2015 By Profit & Loss AJc 8,000
9,500 9,500
31-12.2016To Landlord 13,500 31-12-2016 By Royalty Receivable A/c
(on 9,000 tons @ 50 paise) 4,500
31-12-2016 By Profit & Loss A/c 9,000
13,500 13,500
To Landlord
31-12-2017 12,500 By Royalty Receivable A/c
31-12-2017
(on 10,000 tons @ 50 paise) 5,000
31-12-2017
By Profit & Loss A/c 7,500
12,500 12,500
Note. Alternatively royalty payable may be transferred to Production Account.
SHORTWORKINGS RECOUPABLE ACCOUNT

To Landlord
31-12-2014 3,000 31-12-2014By Balance c/d 3,000
1-1-2015 To Balance b/d 3,000 31-12-2015By Balance c/d 5,500
31-12-2015To Landlord 2,500
5,500 5,500
1-1-2016 To Balance b/d 5,500 31-12-2016By Landlord 1,500
31-12-2016 By Profit & Loss A/c 4,000
5,500 5,500

LANDLORD'S ACCOUNT

To Bank A/c
31-12-2014 12,000 31-12-2014 By Royalty Payable AJc 9,000
31-12-2014 By Shortworkings
Recoupable AIC 3,000
12,000 12,000
31-12-2015To Bank A/c 12,000 31-12-2015 By Royalty Payable A/c 9,500
31-12-2015 By Shortworkings
Recoupable A/c 2,500
12,000 12,000

By Royalty Payable A/c 13,500

31-12-2016 To Shortworkings 31-12-2016

Recoupable A/c 1,500

31-12-2016 To Bank A/c 12,000
13,500 13,500

12,500 31-12-2017 By Royalty Payable Alc 12,500

31-12-2017
To Bank A/c
 21-28 ROYALTYACCOUNrs

ROYALTY RECEIVABLE ACCOUNT

31-12-2015 To Royalty Payable A/c By Ram

1,500 31-12-2015 2,250
31-12-2015 To Profit & Loss A/c 750
2,250 2,250

31-12-2016 To Royalty Payable A/c By Ram

4,500 31-12-2016 6,750
31-12-2016 To Profit & Loss A/c 2,250
6,750 6,750

31-12-2017 To Royalty Payable A/c By Ram

5,000 31-12-2017 7,500
31-12-2017 To Profit & Loss A/c 2,500
7,500 7,500

SHORTWORKINGS ALLOWABLE ACCOUNT

31-12-2015 To Balance c/d 250 31-12-2015

By Ram 250
31-12-2016 TO Ram 250 1-1-2016 By Balance b/d 250

RAM'S ACCOUNT

31-12-2015 To Royalty Receivable A/c 2,250 31-12-2015By Bank A/c 2,500

31-12-2015 To Shortworkings
Allowable A/c 250
2,500 2,500
31-12-2016 To Royalty Receivable A/c 6,750 31-12-2016By Shortworkings
Allowable A/c 250
31-12-2016 By Bank A/c 6,500
6,750 6,750
31-12-2017To Royalty Receivable A/c 7,500 31-12-2016By Bank A/c 7,500
Note. In case of sub-lease minimumrent for the year 2015 will be for half year from July
December 31, 2015 because sub-lease was granted on July 1, 2015. Therefore, minimum rent 1, 2015 to
for 2015 is
2,500 i.e.-xe 5,000
Note. It may be clearly noted that in those cases where royalty payable and royalty
calculated on differentbases such as royalty payable is calculated on production and thereceivable
calculation
are
royalty receivable is done on sales, it will be desirable not to transfer royalties receivable to Of
Payable Account. They will be transferred independentlyto Production Account Royalties
on production and Profit and Loss Account if the basis of calculation is on sales asif calculation is based
illustration given below : has been done in the
ILLUSTRATION 14. (Sub-lease)
Dobsons Ltd. took a licence for production of a foreign
medicine from
Johnson Ltd. at royalty of I per bottle produced.
Dobsons Ltd. issued a sub-licence to MedicoLtd. on the basis of a royalty payment of 1.25
sold, Minimum royalty payable by MedicoLtd. was fixed at e 15,000per annum with a right per bottle
to recouP
shortworkings in the followingyear.
From the given details prepare Royalty Receivable Account, Royalty Payable Account and
Shortworkings Account in the books of Dobsons Ltd.
ROYALTYACCOUNTS 21•29

Dobsons Ltd. Medico Ltd.

Sales Closing Stock Production Closing Stock
1st year 50,000 5,000 10,000 2,000
2nd year 70,000 8,000 18,000 4,000
3rd year 10,000 25,000 5,000
SOLUTION
Royalty receivable is to be calculated on the basis of number of bottles sold. so first number of bottles sold
by Medico Ltd. is calculated to find out the amount of royalty receivable.
Number of bottles sold = Bottles produced + Opening stock —Closing stock
Numberof bottlessold in 1st year = 10,000 + Nil 2,000 = 8,000
Number of bottles sold in 2nd year = 18,000 + 2,000 - 4,000 = 16,000
Number of bottles sold in 3rd year = 25,000 + 4,000 - 5,000 = 24,000
Royalty receivable in 1st year on 8,000 bottles @ 1.25 per bottle= 10,000
Royalty receivable in 2nd year on 16,000 bottles @ 1.25 per bottle = 20,000
Royalty receivable in 3rd year on 24,000 bottles @ 1.25 per bottle= 30,000
ROYALTY RECEIVABLE ACCOUNT

1stYear To Profit& Loss A/c 10,000 1st year By MedicoLtd. 10,000

2nd Year To Profit& Loss A/c 20,000 2nd year By Medico Ltd. 20,000
3rdYear To Profit& Loss A/c 30,000 3rd year By Medico Ltd. 30,000
Royalty payable in case of sub-lease is calculated on the basis of total output ; so first total output is
calculated by adding the productionof Dobsons Ltd. and Medico Ltd.
Production of Dobsons Ltd. Production of Total
(Sale + Closing Stock —Opening Stock) Medico Ltd. Production
1st year 50,000 + 5,000 — Nil 55,000 10,000 65,000
2nd year 70,000 + 8,000 - 5,000 73,000 18,000 91,000
3rd year +10,000- 8,000 25,000
Royalty payable in 1st year on 65,000 bottles @ 1 65,000
Royalty payable in 2nd year on 91 ,OOObottles @ 1 91 ,OOO
Royalty payable in 3rd year on 1,27,000 bottles @ 1 = e
ROYALTY PAYABLE ACCOUNT
1st Year To Johnson Ltd. 65,000 1st year By Production A/c 65,000
2nd year To Johnson Ltd. 91 ,OOO 2nd year By Production A/c 91 .ooo
3rd year To Johnson Ltd. 127,000 3rd year By Production AIC 1.27,ooo

SHORTWORKING ALLOWABLE ACCOUNT

1st Year To Balance c/d 5,000 1st year By MedicoLtd.

(15,000 - 10.000) 5.000
2nd year To Medico Ltd. 5,000 2nd year By Balance b/d 5.000

Shortworking Account can be prepared only in case of a sub-licence given to MedicoLtd. because a
condition of minimum rent of 15,000has been agreed upon. It cannot be prepared in case of original
licence given to Dobsons Ltd. because of no condition of the minimum rent.
 21•30 ROYALTYACCOUM?S

ILLUSTRATION 15. (Sub-lease) on 1st April, 2014 Global Limited, patentees of a new type of
date,
electric razor issued a license to Arthar Limited for the manufacture and sale of razors., On the same
Arthar Limited issued to Allied Limited a sub-license for the same purpose. The license issued by Global
Limited providedfor a royalty of 10 per razor produced, subject to a minimum sum of 75,000to per
annum, and sub-license issued by Arthar Limited provided for a royalty of 15 per razor sold, subject a
minimum sum of 30,000per annum. Both the license and sub-license provided that, should the royalties
for any year be less than the specified minimum, the shortworkings could be recouped, out Ofroyalties, in
excess of the minimum amount falling due for payment in the immediately following two years.
From the following information, prepare Royalties Payable A/c, Royalties Receivable Account, Royalties
Adjustment Account, Shortworkings Recoupable Account and Shortworkings Allowable Account in the
books of Arthar Limited for the years ended 31st March, 2015, 2016 and 2017 .
Arthar Limited
Sales Stock
31-3-2015 3,000 razors 500 razors
31-3-2016 5,000 razors 1,500 razors
31-3-2017 4,900 razors 2,000 razors
Allied Limited
Production Stock
31-3-2015 2,000 razors 440 razors
31-3-2016 3,000 razors 500 razors
31-3-2017 2,400 razors 100 razors
(Adapted C.A. Inter)
SOLUTION
ANALYTICALTABLE OF ROYALTIES PAYABLE
Shortwork- Shortwork-
Total Production Actual ings (Actual ings Recouped
by Arthar Ltd Royalties Royalties (Royalties Shortwork- Payment
Year and Allied Ltd. @ 10 Minimum —Minimum ings not to
ended (Units) per unit Rent) Rent) Recoverable Global Ltd.

31-3-2015 5,500 55,000 20,000 75,000

31-3-2016 9,000 90,000 15,000 75,000
31-3-2017 78,000 3,000 2,000 75.000
Note. Production= Sales + Closing Stock —Opening Stock.
ANALYTICAL TABLE OF ROYALTIES RECEIVABLE
Sales Royalties Amount
by Allied Receivable Short- Short
Year @ e 15 Received
Ltd. Minimum Short- workings workings from Allied
ended per unit Rent workings Allowed lapsed Ltd.
Units
31-3-2015 1,560 23,400 30,000 6,600
31-3-2016 2.940 44.100 30,000
30,000 6,600 37,500
31-3-2017 2,800 42,000 30,000 42,000
Note. Sales = Opening Stock + Production—Closing Stock.
In the Books of Arthar Ltd.
ROYALTIES PAYABLE ACCOUNT

31-3-2015To Global Ltd. A/c 55,000 31-3-2015By ProductionA/c (3,500 x e 10) 35.000
31-3-2015By Royalties Adjustment A/c 20,000
(2,000 x 10)
55,000 55,000
ROYALTYACCOUNTS 21-31

31-3-2016 To Global Ltd. A/c 90,000 31-3-2016By Production A/c 60,000

(6,000 10)
31+2016 By Royalties Adjustment A/c 30.000
(3,000 x 10)
90,000 90,000
310-2017 To Global Ltd. A/c 78,000 31-3-2017By Production A/c 54,000
(5,400 10)
31-3-2017 By Royalties Adjustment A/c 24,000
(2,400 10)
78,000 78.000

ROYALTIES RECEIVABLE ACCOUNT

31-3-2015 To Royalties Adjustment A/c 310-2015 By Allied Ltd. A/c 23,400

(1,560 x? 10) 15,600
31-3-2015 To Profit & Loss A/c 7,800
23,400 23,400
31-3-2016 To Royalties Adjustment A/c 29,400 31-3-2015 By Allied Ltd. A/c 44, 100
(2,940 x 10)
31-3-2016 To Profit & Loss A/c 14,700
44,100 44,100
31-3-2017 To Royalties Adjustment A/c 28,000 31-3-2017By Allied Ltd. Alc 42,000
(2,800 x 10)
310-2017 To Profit & Loss A/c 14,000
42,000 42.000

ROYALTIES ADJUSTMENT ACCOUNT

31-3-2015 To Royalties Payable NC 20,000 31-3-2015 By Royalties Receivable A/c 15.600

31-3-2016 By Balance c/d 4,400
20.000 20.000
1-4-2015TO Balance b/d 4,400 31-3-2016 By Royalties Receivable A/c 29,400
31-3-2016To Royalties Payable A/c 30.000 310-2016 By Balance c/d 5.000
34,400 34,400
1-4-2016To Balance b/d 5,000 31-3-2017 By Royalties Receivable AIC 28,000
310-2017 To Royalties Payable A/c 24,000 31-3-2017 By Balance c/d 1 ,ooo
29,000 29,000
1-4-2017To Balance b/d 1000
Note. The balance in Royalties Adjustment A/c represents the royalties paid to Global Ltd. but not yet
recovered from Allied Ltd.

SHORTWORKINGS RECOUPABLE ACCOUNT

31-3-2015To Global Ltd. A/c 20,000 310-2015 By Balance cid 20,000

 ROYALTY ACCOUNTS
21•32

142015 To Balance b/d

20,000 3142016 By Global Ltd. A/c 15,000
31-3-2016 By Balance c/d 5,000

20.000 20.000

5,000 31-3-2017By Global Ltd. A/c 4000

142016 To Balance b/d
3132017 By Profit & Loss A/c 2,000

5.000 5,000

SHORTWORKINGS ALLOWABLE ACCOUNT

31-3-2015To Balancec/d 6,600 31+2015 By Allied Ltd. Alc 6.600

6,600 1-4-2016 By Balance b/d 6,600

31-3-2016To Allied Ltd. A/c

Questions
OBJECTIVE TYPE
1. Fill in the blanks :
(a) Shortworking is the excess of minimum rent over........ for the year.
(b) Shortworkings recoverable in future are shown in the Balance Sheet on the.
(c) Royalty is calculated either on the basis of ...
(d) When shortworkings are recovered, debit is given to............
(e) Irrecoverable shortworkings are transferred to .... Account.
(f) Royalty account is a................account.
(g) The right of recoupment of shortworkings can
Ans. [(a) royalty payable ; (b) assets side ; (c) output or sales ; (d) Landlord's Account ;
(e) Profit and Loss ; (f' nominal ; (g) restricted or unrestricted).
2. State whether the following statements are true or false :
(a) Royalty Account is a real account.
(b) When the shortworkings becomeirrecoverable, the same are debited to the Trading Account.
(c) Royalty paid on sales is debited to the Profit and Loss Account.
(d) The fixation of minimum rent guarantees the landlord the receipt of the minimum amount in
case of low output or sales.
(e) Royalty Account is closed by transferring it to the Landlord's Account.
(f) Shortworkings should be carried forward and shown in the Balance Sheet so long as they are
recoverable.
Ans. (True : (c), (d) and (D ; False : (b) and (ell.
3. Choose the correct answer
(a) Royalty Account is :
(i) Nominal A/c, (ii) Personal Account, (iii) Real Account.
(b) Shortworkings can be recouped out of
(i) Minimum rent (ii) Excess of actual Royalty over minimum rent
(iii) Excess of minimum rent over actual royalty
(it.') Profit and Loss Account.
(c) The lessee's right to recoup shortworking's related to :
(i) first four years (ii) terms of the agreement (iii) Subsequent three years.
by
Royalty payable is debited lessee to :
(i) Royalty A/c (ii) Landlord A/c (iii) Profit & Loss A/c.
(e) Royalty earned by the lessor is credited to :
(i) Sub-lease A/c (ii) Profit & Loss A/c (iii) Royalty Receivable A/c