Mada za sehemu hiiAccounting For RoyaltiesMada 4
- Meaning of royalties
- Minimum rent and short workings
- Accounting entries in the books of lessor
- Accounting entries in the books of lessee
The following accounts are to be maintained in the books of the lessor:
This account is used to record the amount of royalties earned in any period by the company from lessee who uses lessor's assets under royalty agreements. This account is created by the owner of the asset. It is an income account.
This account is used to record royalty receivable, amount received from lessee and short workings. It is an asset account.
This account is used to record the excess amount of minimum rent over the actual royalties allowable to lessee.
i. When minimum rent is receivable
The lessor recognizes the Minimum Rent as income, regardless of whether it is fully covered by actual royalties.
Journal Entry
- Debit: Royalty Receivable Account
- Credit: Royalty Income Account
ii. When actual royalty exceeds minimum rent
If actual royalties from usage or production exceed the Minimum Rent, the surplus is recorded as additional income.
Journal Entry
- Debit: Royalty Receivable Account
- Credit: Royalty Income Account
iii. When short workings arise
If actual royalties fall short of the Minimum Rent, the difference (Short Workings) is recorded in the accounts.
Journal Entry
- Debit: Short Workings Account
- Credit: Royalty Receivable Account
iv. When short workings are recouped
When surplus royalties in subsequent periods allow the licensee to recover Short Workings, the lessor adjusts the Short Workings account.
Journal Entry
- Debit: Royalty Receivable Account
- Credit: Short Workings Account
v. When royalty payments are received
The lessor records cash or bank receipts for royalty payments made by the licensee.
Journal Entry
- Debit: Cash/Bank Account
- Credit: Royalty Receivable Account
vi. When short workings are irrecoverable
If the licensee cannot recoup Short Workings within the agreed timeframe, the lessor writes off the irrecoverable balance.
Journal Entry
- Debit: Profit and Loss Account (or Write-Off Expense Account)
- Credit: Short Workings Account
MKWAKWANI Drilling Group (MDG) Ltd. granted a mining lease to Pangani Ltd., on the basis that Pangani Ltd pays a royalty of TZS 30,000 per ton of ore mined subject to a minimum rent of TZS 10,000,000 per year. The output in five years was as follows:
| Year | Output (Tons) |
|---|---|
| 2014 | 200 |
| 2015 | 300 |
| 2016 | 400 |
| 2017 | 300 |
| 2018 | 350 |
Required: Compute royalty, short workings, recoupment, transfers to income statement and amount receivable from lessee under the following cases:
- Pangani Ltd. has the right to recoup the short workings within the first four years of the lease contract and not afterwards.
- Pangani Ltd. has the right to recoup the short workings within three years following the payment of the respective short workings and not afterwards.
| Year | Output (Quantity) | Actual Royalty | Minimum Rent | Short Workings | Recoupments | Irrecoverable Short Workings | Royalty Paid |
|---|---|---|---|---|---|---|---|
| 2015 | 6,250 | 12,500,000 | 15,000,000 | 2,500,000 | - | - | 15,000,000 |
| 2016 | 6,875 | 13,750,000 | 15,000,000 | 1,250,000 | - | - | 15,000,000 |
| 2017 | 7,200 | 14,400,000 | 15,000,000 | 600,000 | - | - | 15,000,000 |
| 2018 | 8,500 | 17,000,000 | 15,000,000 | - | 2,000,000 | 2,350,000 | 15,000,000 |
| 2019 | 10,250 | 20,500,000 | 15,000,000 | - | - | - | 20,500,000 |
| 2020 | 11,000 | 22,000,000 | 15,000,000 | - | - | - | 22,000,000 |
Dr. Royalty Income Account Cr.
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31^st^ Dec., 2015 | Income statement | 12,500,000 | 31^st^ Dec., 2015 | CHEMBA Ltd. | 12,500,000 |
| 31^st^ Dec., 2016 | Income statement | 13,750,000 | 31^st^ Dec., 2016 | CHEMBA Ltd. | 13,750,000 |
| 31^st^ Dec., 2017 | Income statement | 14,400,000 | 31^st^ Dec., 2017 | CHEMBA Ltd. | 14,400,000 |
| 31^st^ Dec., 2018 | Income statement | 17,000,000 | 31^st^ Dec., 2018 | CHEMBA Ltd. | 17,000,000 |
| 31^st^ Dec., 2019 | Income statement | 20,500,000 | 31^st^ Dec., 2019 | CHEMBA Ltd. | 20,500,000 |
| 31^st^ Dec., 2020 | Income statement | 22,000,000 | 31^st^ Dec., 2020 | CHEMBA Ltd. | 22,000,000 |
Dr. CHEMBA Ltd. Account Cr.
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31^st^ Dec., 2015 | Royalty income | 12,500,000 | 31^st^ Dec., 2015 | Bank | 15,000,000 |
| 31^st^ Dec., 2015 | Short workings allowable | 2,500,000 | |||
| 31^st^ Dec., 2016 | Royalty income | 13,750,000 | 31^st^ Dec., 2016 | Bank | 15,000,000 |
| 31^st^ Dec., 2016 | Short workings allowable | 1,250,000 | |||
| 31^st^ Dec., 2017 | Royalty income | 14,400,000 | 31^st^ Dec., 2017 | Bank | 15,000,000 |
| 31^st^ Dec., 2017 | Short workings allowable | 600,000 | |||
| 31^st^ Dec., 2018 | Royalty income | 17,000,000 | 31^st^ Dec., 2018 | Short workings allowable | 2,000,000 |
| 31^st^ Dec., 2018 | Bank | 17,000,000 | |||
| 31^st^ Dec., 2019 | Royalty income | 20,500,000 | 31^st^ Dec., 2019 | Bank | 20,500,000 |
| 31^st^ Dec., 2020 | Royalty income | 22,000,000 | 31^st^ Dec., 2020 | Bank | 22,000,000 |
Dr. Short Workings Allowable Account Cr.
| Date | Details | TZS | Date | Details | TZS |
|---|---|---|---|---|---|
| 31^st^ Dec., 2015 | Balance c/d | 2,500,000 | 31^st^ Dec., 2015 | CHEMBA Ltd. | 2,500,000 |
| 31^st^ Dec., 2016 | Balance c/d | 3,750,000 | 1^st^ Dec., 2016 | Balance b/d | 2,500,000 |
| 31^st^ Dec., 2016 | CHEMBA Ltd. | 1,250,000 | |||
| 31^st^ Dec., 2017 | Balance c/d | 4,350,000 | 1^st^ Dec., 2017 | Balance b/d | 3,750,000 |
| 31^st^ Dec., 2017 | CHEMBA Ltd. | 600,000 | |||
| 31^st^ Dec., 2018 | CHEMBA Ltd. | 2,000,000 | 1^st^ Dec., 2018 | Balance b/d | 4,350,000 |
| 31^st^ Dec., 2018 | Income statement | 2,350,000 |
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