- Slides: 35
INTRODUCTION Ø Royalty is an amount payable for utilizing the benefit of certain rights vested with some other person. Ø It is a periodical sum based on the output payable by the lessee to the lesser for having utilised the rights of the lessor. Ø Lessee: the person who makes the payment to the owner of the asset Ø Lessor: it is the owner of the asset
• There are some special rights over something which are possessed by some person • For ex: - A author has an exclusive copywriter over the work or his writing in the form of a book. When these rights give to some other person on lease basis for some consideration there come into existence a royalty agreement
ROYALITY AGREEMENT : - It is an agreement between the two parties , i. e. , the person who gives out his special rights and the person who takes out the special right on lease for a consideration. .
DISTINCTION BETWEEN ROYALTY AND RENT ROYALTY • • RENT It is the consideration payable • It is consideration payable for use of only tangible assets. for the use of special right for both tangible and intangible assets. Paid either on the basis of • Paid on the basis of period. output or sale. Varies on the basis of output or • It is fixed. sale. Its agreement normally consists of a clause to pay a minimum • There is no concept of minimum rent.
Terms used in royalty agreements • Landlord: -The person who gives out his special rights over something say mining rights copywriter on lease to another person for consideration is called the landlord or lesser or an author • Lessee: -The person who takes out the special rights from its owner on lease for a consideration is called a lessee or publisher
• Royalty: -Royalty is a periodical payment based on output or sales for the use of a certain assets or right like mine, copyright or patent to its owner. Types of Royalties Mining Royalty Copyright Royalty Patent Royalty
TYPES OF ROYALTIES • There are various types of royalties: – Mining royalties – Brick-making royalties – Oil-wells royalties – Patent royalties – Copyright royalties
MINIMUM RENT • Royalty agreements are usually associated with a clause that the lessor or landlord must receive a minimum amount whatever be the production or sales in a particular period. • Such minimum amount is known as minimum rent or dead rent of fixed rent. • In the absence of minimum rent, the lessee may acquire rights from different landlords to obviate competition.
SHORTWORKINGS • The excess of minimum rent over actual royalty calculated on the basis of output or sales is known as short workings. • Normally they are during gestation period or due to abnormal working conditions or during the early periods of lease as the activity level is low in that period.
GROUND RENT • It is the fixed yearly or half yearly rent payable by the lessee to the landlord in addition to the minimum rent. • It is also known as surface rent.
RECOUPMENT OF SHORTWORKINGS • It means recovery of short workings of the previous years of surplus royalty of subsequent years. The following conditions can be there for recoupment of short workings: – They are recouped when there is surplus – It is to be done within an agreed period – If short workings cannot be recouped within the agreed period, it will be transferred to profit and loss account.
SURPLUS • It indicates the excess of actual amount of royalty over minimum rent. • Surplus= actual royalty – minimum rent • Short workings can be recouped only when the lessee has a right to recoup and there is a surplus.
• Recoupment of short working: - It means the recovery of short working of the previous years out of surplus royalty of subsequent yearly. The following condition can be there for recoupment of short workings: a) Short working are recouped when there is surplus i. e. , excess of royalty over minimum rent. b) Recoupment of short working is to be done within the agreed period as given in the agreement. c) If short working 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.
ACCOUNTING ENTRIES IN THE BOOKS OF LESSEE • I. WHEN THERE ARE NO ROYALITIES IN A YEAR • II. WHEN ROYALITIES ARE LESS THAN THE MINIMUM RENT AND SHORTWORKINGS ARE RECOVERABLE IN SUBSEQUENT YEARS • III. WHEN ROYALTIES ARE EQUAL TO MINIMUM RENT IN A YEAR • IV. WHEN ROYALTIES EXCEED THE MINIMUM RENT AND SHORTWORKINGS ARE RECOUPED
Accounting Entries In the books of the lessee • When there are no royalties in a year a) If minimum rent is not opened Shortworkings Account Dr. To landlord's Account b) If minimum rent is opened (1) Minimum rent account Dr. To landlord account (2) Shortworkings account Dr. To minimum rent account
• When royalty are less than the minimum rent and short working are recoverable in subsequent years: If minimum rent account is not opened (a) Royalties account Dr. Shortworkings account Dr. To landlord (b) Landlord account Dr. To bank account (c) Profit and loss account Dr. To royalties account
If minimum rent or dead rent account is opened in the books (a) Minimum rent account Dr. To landlord account (b) Royalty account Dr. Shortworkings account Dr. To minimum rent account (c) Landlord account Dr. To bank account (d) Profit and loss account Dr. To royalties account
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 account Dr. s. To landlord account Other entries will be the same as In case of (II) above.
When royalties exceed the minimum rent and short working are recouped: (a) Royalties account Dr. To landlord account (b) Landlord account Dr. To short working account To bank account (c) Profit and loss account Dr. To royalties account
III. WHEN ROYALTIES ARE EQUAL TO MINIMUM RENT IN A YEAR As there will be no short workings, no minimum rent A/c is opened. So the entry for the amount payable to the landlord will be Royalties A/c Dr To landlord A/c
IV. WHEN ROYALTIES EXCEED THE MINIMUM RENT AND SHORTWORKINGS ARE RECOUPED • Royalties A/c Dr To landlord A/c (Being the amount of royalties earnedby the landlord) • Landlord A/c Dr To Shortworkings A/c To Bank A/c • Profit & loss A/c Dr To royalties A/c (Being actual royalties earned transferred to profit & loss A/c)
Stoppage of work due to Strike/Lockout/Accident Whenever there is stoppage of work due to abnormal reasons as strike, lockout, accident or for any other reason, the minimum rent is required to the adjustment as provided for in the agreement. Such agreement may have the following arrangements:
1) 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 short working or surplus.
2) Reduction In the amount of minimum rent: - If there is any clause in the agreement, regarding 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.
ACCOUNTS TO BE PREPARED : - 1) 2) 3) 4) 5) 6) Analytical table Royalty account Short workings account Minimum rent account Landlords account Lessee’s account
Accounting enteries in books of lessor (or landlord ) 1) When the royalties received are less then the minimum rent and shore workings are recoverable out of future years , (a) Lessee’s Account To Royalties receivable account To Short workings suspense account Dr. (b) Bank Account To Lessee’s Account Dr. (c) Royalties Receivable Account To Profit and loss account Dr.
(2) When the royalties earned exceed the minimum rent and short workings are recovered (a) Lessee’s Account To Royalties Receivable Account Dr. (b) Short workings Suspense Account To Lessee’s Account Dr. (c) Bank Account To Lessee’s Account (d) Royalties Receivable Account To Profit and Loss Account Dr.
COPY RIGHT ROYLATIES THE NO. OF COPIES SOLD CAN BE CALCULATED AS : Opening stock of Books ADD : Number of Books Printed Books Available LESS : Spicemen Books Waste Books Closing Stock Of Books No. Of Books Sold during the year NO. XX XX
DAMAGE PAID BY THE LESSOR (AUTHOR) TO THE LESSEE (PUBLISHER) a) In the Books of the publisher Author’s Account Dr. To Damage Receivable Account b) In the Books of the Author Damages Payable Account To Publisher Account Dr.
ILLUSTRATION : X Ltd. Took a mine on Lease from Y at a given rate of Royalty with a minimum rent of Rs. 10000 a year. Each year’s excess of minimum rent over royalties is recoverable out of the next year only. In the event of a strike and the minimum rent not being reached , it was provided that the actual royalties earned for the year would be the full royalty obligation for the year. The results of the working were as follows : Year 1 ST 2 ND 3 RD 4 TH Actual Royalties nil 8000 90000 ( Strike ) Prepare Short workings Account , Minimum rent Account , and Royalities Account for all the years in the books of X ltd.
IN THE BOOKS OF X LTD. ANALYTICAL TABLE Year royalty Short Surplus working RS. Short working recouped not recouped RS. - 10, 000 - 2 ND 8, 000 2, 000 - - 10, 000 3 RD 8, 000 - - 2, 000 8, 000 4 TH 9, 000 - - 1, 000 - RS. 1 ST - - Payment to landlord - 10, 000
SHORT WORKINGS ACCOUNT YEAR PARTICULARS AMOUNT 1 ST To Minimum rent a/c 10, 000 1 st By balance c/d 10, 000 2 nd To balance b/d To Minimum rent a/c 10, 000 2 nd By Profit and loss a/c By balance c/d 10, 000 2, 000 12, 000 3 rd To balance b/d 2, 000 3 rd By Profit and loss a/c 2, 000 4 th To minimum rent a/c 1, 000 4 th By balance c/d 1, 000 5 th To balance b/d 1, 000
MINIMUM RENT ACCOUNT YEAR PARTICULARS AMOUNT 1 ST To Y 10, 000 1 st By Short workings a/c 10, 000 2 nd To Y 10, 000 2 nd By Royalties a/c By Short workings a/c 8, 000 2, 000 10, 000 4 th To Y 10, 000 4 th By Royalties a/c By Short workings a/c 9, 000 10, 000
ROYALTIES ACCOUNT YEAR PARTICULARS AMOUNT 2 ND To Minimum rent a/c 8, 000 2 nd By profit and loss a/c 8, 000 3 rd To Y 8, 000 3 rd By profit and loss a/c 8, 000 4 th To Minimum rent a/c 9, 000 4 th By profit and loss a/c 8, 000