COC Royalty Account CA/CMA Santosh Kumar

Royalty Account

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Question 1. The Consett Colliery took a lease of a mine from Big Company for a period of 30 years from 1st January, 1995 upon
the terms of a royalty of 50 paise per tonne upon the output with a minimum rent of Rs. 10,000 in the first year and then
increasing every year by Rs. 1,000, till it reaches Rs. 13,000 when it becomes fixed for all the coming years. The Consett Colliery
Company was granted the right of recouping short working of any year in the subsequent 3 years and not afterwards. The
following was the production of the first 5 years:
1995 3,000 tonnes
1996 18,000 tonnes
1997 24,000 tonnes
1998 30,000 tonnes
1999 32,000 tonnes
Show journal entries in the books of Consett Colliery Company when —there is no minimum rent account.
Answer:
Before solving problem the following table may be prepared;
Year Production Royalty Minimum Short working

rent Resulted Recouped Transferred

1 2 3 4 5 6 7
Tonnes Rs. Rs. Rs. Rs. Rs.
1995 3,000 1,500 10,000 8,500
1996 18,000 9,000 11,000 2,000
1997 24,000 12,000 12,000 — — —
1998 30,000 15,000 13,000 — 2,000 6,500
1999 32,000 16,000 13,000 — 2,000 —
(a) Column 3 shows the royalty which is equal to production multiplied with the rate of royalty;
(b) Column 5 shows the excess of minimum rent over actual royalty earned;
(c) Recoupment and transfer shown in columns 6 and 7 respectively depend upon the right of recoupment. In this
case short working in 1995 can be recouped up to 1998 (i.e., next 3 years). Since only Rs. 2,000 could be recouped, rest Rs.
6,500 has been transferred to profit and loss account. The short working of 1996 has been recouped fully in 1999 (again
within next three years).

Without minimum rent account

JOURNAL OF CONSETT COMPANY
1995 Rs.
Royalty account Short working Dr. 1,500
account Dr. 8,500
To Big company 10,000
Big Company Dr. 10,000
To Bank account 10,000
Production account Dr. 1,500
To Royalty Account 1,500
1996 Royalty account Short working Dr. 9,000
account Dr. 2,000
To Big Company 11,000

Big Company Dr. 11,000

To Bank account 11,000
Production account Dr. 9,000
To Royalty account 9,000
1997 Royalty account Dr. 12,000
To Big Company 12,000
Big Company Dr. 12,000
To Bank account 12,000
Production account Dr. 12,000
To Royalty account 12,000

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1998 Royalty account Dr. 15,000

To Big Company 15,000
Big Company Dr. 15,000
To Short working account (recouped) 2,000
To Bank account 13,000
Profit and loss account Dr. 6,500
To Short working account (un-recouped) 6,500
Production account Dr. 15,000
To Royalty account 15,000
1999 Royalty account Dr. 16,000
To Big Company 16,000
Big Company Dr. 2,000
To Short working account 2,000
Big Company Dr. 14,000
To Bank account 14,000
Production account Dr. 16,000
To Royalty account 16,000

Question:2 Hindustan Steel Ltd. obtained a lease from Gondwana Coal Ltd. for a coal mine on 1st January 1994 on the
following terms and conditions :
(1) Royalty at Re. 1 per tonne raised.
(2) Minimum rent Rs. 12,000 p.a.
(3) Recoupment of short working on each year during three years following subject to a maximum of Rs. 2,500 p.a.
(4) In the event of the strike, the minimum rent would be taken pro rata on the basis of actual working days, but in the event
of lock-out, the lessee would enjoy a concession in respect of minimum rent for 50% of the period of lock-out.
Besides the above, Hindustan Steel Ltd. have been granted a cash subsidy equal to 25% of the unrecoupable short workings by
the Central Government upto the first 5 years of the lease.
(5) Working up to first 6 years is as follows;
1994 Actual Royalty Rs. 7,000
1995 Actual Royalty Rs. 10,200
1996 Actual Royalty Rs. 16,100
1997 Actual Royalty Rs. 13,600
1998 Actual Royalty Rs. 10,800 (Strike 73 days)
1999 Actual Royalty Rs. 9,700 (Lock-out for 4 months)
Show the ledger accounts in the books of Hindustan Steel Ltd. (Adapted from CA.)

Question : 3 Maniram Singh, who had patented a circular TV antenna, granted Sky Enterprise a licence for ten years to
manufacture and sell the product on the following terms :
1. Sky Enterprise was to pay Maniram Singh a royalty of Rs. 10 for each antenna sold.
2. The minimum royalty for each of the first three years covered by the licence was to be Rs. 50,000. After these years royalties
were to be payable on the actual numbers of antennas sold.
3. If royalties on antenna sold amounted to less than Rs. 50,000, Sky Enterprise was entitled to deduct the deficiencies from
royalties in excess of the sum payable in respect of each of the first three years of the agreement.
The numbers of antennas sold in the first four years were as follows:
Year ended 31st March 1994 4,300
1995 4,900
1996 5,450
1997 5,250
You are required to prepare the following ledger accounts recording the above transactions in respect of royalties in the
books of Sky Enterprise:
(a) Royalties account;
(b) Short-workings account; and
(c) The account of Maniram Singh. [ I.CW.A. Stage in, Dec. 1997]

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 COC Royalty Account CA/CMA Santosh Kumar

Answer: COMPUTATION OF ROYALTY PAYABLE MINIMUM RENT & SHORTWORKINGS

Year No. of Royalty Minimum Short- Short-

Item payable rent working working
recoverable
Rs. Rs. Rs. Rs.
31.3.1994 4,300 43,000 50,000 7,000
31.3.1995 4,900 49,000 50,000 1,000
31.3.1996 5,450 54,500 50,000 4,500
31.3.1997 5,250 52,500 50,000
8,000 4,500
Dr. (a) ROYALTIES ACCOUNT Cr
Date Particulars Rs. Date Particulars Rs.
31.3.94 To M. Singh A/c 43,000 31.3.94 By Manf. A/c 43,00
31.3.95 To M. Singh A/c 49,000 31.3.95 By Manf. A/c 49,000
31.3.96 To M. Singh A/c 54,500 31.3.96 By Manf. A/c 54,000

31.3.97 To M. Singh A/c 52,500 31.3.97 By Manf. A/c 52,000

Dr. (b) SHORTWORKING ACCOUNT Cr.
Date Particulars Rs. Date Particulars Rs.
31.3.94 To M. Singh A/c 7,000 31.3.94 By Balance c/d 7,000
1.4.94 To Balance b/d 7,000 31.3.95 By Balance c/d 8,000
31.3.95 To M. Singh A/c 1,000
8,000 8,000
1.4.95 To Balance b/d 8,000 31.3.86 By M. Singh A/c 4,500
. By P&LA/c 3,500
8,000 8,000
Dr. (c) MANIRAM SINGH'S ACCOUNT Cr
Dare Particulars Rs. Date Particulars Rs.
31.3.94 To bank A/c 50,000 31.3.94 By Royalties A/c 43,000
By Shortworking A/c 7,000
31.3.95 To Bank A/c 50,000 50,000
50,000 31.3.95 By Royalties A/c 49,000
By Shortworking A/c 1,000
To Shortworking A/c
31.3.96 50,000 50,000
To Bank A/c 31.6.96 By Royalties A/c
4,500 54,000
50,000
54,500
To Bank A/c 31.3.97 By Royalties A/c 54,500
31.3.97 52,500
52,500 52,500
52,500
Question 4. The following information has been obtained from the books of a lessee relating to the years 1994-95 to 1997-98:
Payment to landlord (after deduction of tax © 20%)
1994-95 Rs. 12,000
1995-96 Rs. 12,000
1996-97 Rs. 12,000
1997-98 Rs. 19,200
Short workings recovered :
1995-96 Rs. 2,500
1996-97 Rs. 1,000
Short working written off
1998-99 Rs. 500
Short working balance brought forward on April 1,1994 Rs. 800 (which arose in 1992-93). According to the terms of agreement
short working is recoverable within the next two years following the year in which short working arises.
You are required to prepare the royalty account and the landlord's account for the four year ended March 31,1998.

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[I.C.W.A. (Inter), June 1993]

Question 5. A fire occurred in the office premises of lessee in the evening of March 31, 1999 destroying most of the books and records. The
following information is, however, available from the documents saved:
Short workings recovered :
1996-97 : Rs. 2,000 (towards short working which arose in 1993-94)
1997-98 : Rs. 4,000 (including Rs. 1,000 for short working in 1994-95)
1998-99 : Rs. 1,000
Short workings lapsed :
1995-96 : Rs. 1,500
1996-97 : Rs. 1,800
1998-99 : Rs. 1.000
A sum of Rs. 25,000 was paid to the Landlord in 1995-96. The agreement of royalty contains clause of Minimum rent payable for a fixed
amount and recoupment of short working within 3 year following the year in which short working arises.
Information as regards payments to Landlord subsequent to the year 1995-96 is not readily available.
You are required to prepare the royalty account and short working account for the four years ended 31st March 1999.
[I.C.W.A (Inter)]

Answer: ROYALTY ACCOUNT

1995-96 To Landlord Rs. 20,000 1995-96 Rs.
1996-97 To Land Lord 25,000 1996-97 By-Trading A/c 20,000
,, Short working 2,000 By Trading A/c 27,000
27,000
To Land Lord 25,000
1997-98 27,000
,, Short working 4,000 1997-98 By Trading A/c
29,000
29,000
To Land Lord 25,000
1998-99 ,, Short working 1,000 1998-99 By Trading A/c 29,000
26,000 26,000

26,000
SHORTWORKING ACCOUNT CR.
Rs. Rs.
1995-96 To Balance b/d (4) 6,300 1995-96 By P&LA/c 1,500
„ Landlord (2) 5,000 ,, Balance c/d 9,800
11,300 11,300

1996-97 To Balance b/d 9,800 1996-97 By Royalty A/C 2,000

„ P&LA/c 1,800
,, Balance c/d 6,000

9,800 9,800
1997-98 To Balance b/d 6,000 1997-98 By Royalty A/c 4,000
,, Balance c/d 2,000
6,000 6,000
1998-99 To Balance b/d 2,000 1998-99 By Royalty A/c 1,000
„ P&LA/c 1,000
2,000 2,000
Tutorial Notes :
(1) AVAILABLE INFORMATION TABULATED
Year Short working Short working lapsed Payment to Landlord
recovered

1995-96 — 1,500 25,000

1996-97 Rs. 2,000 (for short-working 1,800 —
in 1993-1994)
1997-98 Rs. 4,000 (including
Rs. 1,000 for short-working ---- —
in 1994-1995)
1998-99 1,000 1,000 —
(2) SHORTWORKING IN 1995-96.
Rs.
Short workings lapsed in 1998-99 must be
relating to 1995-96 because of 3 year period 1,000
Short workings recovered in 1998-99 also relate
to 95-96. 1,000

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 COC Royalty Account CA/CMA Santosh Kumar

Short workings recovered in 1997-98 Rs. 4,000 of which

Rs. 1.000 for on 1994-95; the balance relates to 1995-96 3,000
Total 5,000
(3) STATEMENT OF ROYALTY AND SHOR'."WORKINGS

Year Royalty Short- Short- Short- Payment to

workings workings workings landlord
recovered lapsed (minimum
confirmed)
1995-96 20,000 5,000 NIL 1,500 Rs. 25,000
1996-97 27,000 NIL 2,000 1,800 Rs. 25,000
1997-98 29,000 NIL 4,000 NIL Rs. 25,000
1998-99 26,000 NIL 1,000 1,000 Rs. 25,000
(4) Rs. 1.500 lapsed in 1995-96 + Rs. 1,800 lapsed in 1996-97 + Rs. 2.000 recovered in 1996-97 + Rs. 1,000 Shortworkings in
1994-95 = Rs. 6,300.

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