Royalty -
At A Certain Rate In Percentage Based On Output

The term "Royalty" is used for the periodical payment made for utilizing the property or right of a person by another person. Royalty is generally calculated at a certain rate based on output or sale during a specified period. It is normally expressed in terms of percentage.

e.g.; patent, copyright, franchisee, mine, query, etc

The owner of the property to whom the payment is made is known as 'Lessor' and the person who makes the payment for using the property is known as 'Lessee'

Meaning of Minimum Rent or Dead Rent:

Minimum Rent is the amount that is guaranteed by the Lessee to the Lessor for a particular period for usage of the property whether any benefit is derived or not. It is the amount provided to the Lessor in assurance of a moderate and certain regular income.

The amount of minimum rent is predefined and is disclosed in the Royalty Agreement signed by both the parties.

Minimum Rent is generally paid when the amount of royalty falls less than the minimum rent. But is the amount of royalty surpluses the minimum rent, royalty falls payable.

Minimum Rent is also known as Dead Rent, or Contract Rent.

Shortworking:

Shortworking is the amount excess of minimum rent over actual royalty for a particular period.

In other words, whenever the minimum rent is more than the actual royalty, the difference is called shortworking.

Lapse of Shortworking:

Lapse of Shortworking refers to the excess rent over royalty previously paid to the Lessor that cannot be recouped now by the Lessee. Such lapse of Shortworking is a treated as a loss for the tenant as because excess payment to the landlord cannot be recoverd anymore.

Surplus:

It is the actual royalty amount in excess of minimum rent.

Recoupment of Shortworking:

The process of adjusting the shortworking (royalty less than minimum rent) of a certain period against the surplus (actual royalty higher than minimum rent) of subsequent period is called "Recoupment of Shortworking". The process of recoupment of shortworking is subject to certain limitations.

Strike And Lock Out:

The term "Strike" refers to labour unrest and is being called by the labour unions. On the contrary, lock out is the right of the owner of the assets to close or shut down the working site fulfilling all legal formalities.

Both strike and lockout have a tolling effect resulting in stoppage in production. In such a situation, the Lessor may accept royalty on the basis of actual output. The Royalty Agreement must have a provision for this effect.

Accounting Entries In The Books Of Lessor:

For Royalty Receivable:

Lessee A/c-------------------------------Dr.

 To Royalty Receivable A/c

 To Shortworking Allowable A/c

(Being royalty receivable from Lessee @-------- per ton on ------- subject to minimum rent of Rs. -----------------)

When Royalty Is Equal To Or More Than Minimum Rent:

Lessee A/c-------------------------------Dr.

 To Royalty Receivable A/c

(Being royalty receivable from Lessee @ ---------- paisa per ton on ------------- tons)

For Recoupment Of Past Short working From Lessee:

Short Working Allowable A/c------------------------------Dr.

 To Lessee

(Being shortworking recouped from Lessee)

For Irrecoupable Shortworking:

Short Working Allowable A/c--------------------------------Dr.

 To Profit & Loss A/c

(Being the Irrecoupable shortworking transferred to Profit & Loss Account)

For Receipt Of Payment From Lessee:

Cash/Bank A/c--------------------------------Dr.

 To Lessee A/c

(Being the amount due from Lessee received)

For Closing Of Royalty Account:

Royalty Receivable A/c--------------------------------Dr.

 To Profit & Loss A/c

(Being the actual royalty receivable transferred to Profit & Loss Account)

Accounting Entries In The Books Of Lessee:

1. For Royalty Payable:

A. When Royalty Is Less Than The Minimum Rent:

Without Maintaining Minimum Rent Account:

Royalty A/c----------------------------------Dr.

Short Working A/c-----------------------Dr.

 To Landlord A/c

(Being royalty payable to landlord @-------- per ton on ------- subject to minimum rent of Rs. -----------------)

Through Minimum Rent Account:

1. Minimum Rent A/c---------------------------------Dr.

 To Landlord A/c

(Being the amount of minimum rent payable)

2. Royalty A/c---------------------------------Dr.

Shortworking A/c---------------------------------Dr.

 To Minimum Rent A/c

(Being the amount of royalty payable to Landlord @ ----------paisa per ton on ------------- tons subject to minimum rent of Rs.--------)

When Royalty Is Equal To Or More Than Minimum Rent:

3. For Actual Royalties:

Royalties A/c---------------------------------Dr.

 To Landlord A/c

(Being the royalty payable to Landlord @ ---------- paisa per ton on ------------- tons)

For Recoupment Of Past Short Coming Form The Years Surplus:

Landlord A/c---------------------------------Dr.

 To Short working A/c

(Being shortworking recouped from landlord)

For Irrecoupable Short Workings:

Profit And Loss A/c---------------------------------Dr.

 To Shortworking A/c

(Being irrecoupable shortworking transferred to profit & loss account)

For Payment To Landlord:

Landlord A/c---------------------------------Dr.

 To Cash/Bank A/c

(Being the amount due to landlord paid off)

For Closing Of Royalty A/c:

Production A/c---------------------------------Dr.

 To Royalty A/c

(Being Royalty Account closed by transferring it to Production)

Royalty Receivable Account:

This account is to be opened in the books of the Lessor.

Journal Entries If The Royalty Is Below Minimum Rent:

Lessee's A/c -------------------Dr. (with the amount of minimum rent)

 To Royalty Receivable A/c (with the amount of difference representing shortworkings allowable)

Bank A/c -------------------Dr. (with the amount received)

 To Lessee's A/c

Royalties Receivable A/c -------------------Dr. (with the amount of royalties transferred to P/L A/c)

 To Profit and Loss A/c

The Royalties Suspense Account will be carried forward for the purpose of being set off in the future years and hence will be shown in the assets side of the balance sheet. When it becomes irrecoverable, it is transferred to the Profit and Loss A/c

Journal Entries If The Royalty Exceeds Minimum Rent:

Lessee A/c -------------------Dr. (with the amount due to be paid)

Royalties Suspense A/c -------------------Dr. (with the amount of shortworkings recouped in that year out of surplus)

 To Royalties Receivable A/c (with the amount of royalties as compared on the output using the given rate)

Bank A/c -------------------Dr. (with the amount received)

 To Lessee's A/c

Royalties Receivable A/c -------------------Dr. (transfer of the amount of royalties due to the Profit and Loss A/c)

 To Profit And Loss A/c