BBA110 CU - Sem 2 -Bcom-BBA- Advance Accounting-converted

9. Short working means a) Minimum Rent over actual Royalty b) Actual Output c) A payment paid by owner d) All of these 10. Lessee's right to recoup short-working is related to a) Terms and agreement b) During whole period of agreement c) For next three year d) All of these Answers 1. a 2. a 3. a 4. a 5. a 6. d 7.a 8. a 9.a 10. a REFERENCES • Maheshwari, S.N., and Maheshwari, S. K. (2002). Financial Accounting. New Delhi: Vikas Publishing House. • Lal, Jawahar. & Srivastava, Seema. (2009). Financial Accounting Text &Problems. Mumbai: Himalaya Publishing House. • Accounting: For Small Businesses QuickStart Guide – Understanding Accounting for Your Sole Proprietorship, Start-up, & LLC - (Clydebank Media LLC, 28 February 2016) • Fundamental Accounting Principles -(McGraw Hill, 20 October 2008) 301 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT-15 ROYALTY ACCOUNTING Structure Learning Objective Introduction Meaning Accounting entries in the books of Lessor and Lessee. Summary Key words Learning Activity Unit -End Questions References LEARNING OBJECTIVES After studying this unit, you will be able to: • State accounting entries in the books of lessor and lessee • Describe Royalty Accounts INTRODUCTION Payments to songwriters often take the form of royalties. These payments occur when songwriters do not have the means to produce and distribute their own music. Even if they could distribute their music on their own, it is understandably difficult for a single entity to keep track of a song’s sales and the amount of radio play it receives. Record companies tend to take over this role. Because the sales of any song are so variable, songwriters get a cut based on the total income earned. Hence the importance of royalty accounting. MEANING A royalty is a legally-binding payment made to an individual, for the ongoing use of his or her originally-created assets, including copyrighted works, franchises, and natural resources. But royalties are predominantly associated with musicians, who receive such payments whenever their originally-recorded songs are played on the radio or television, used in movies, performed at concerts, bars, and restaurants, or consumed via streaming services. In most cases, royalties are revenue generators specifically designed to compensate the owners of songs or properties, when they license out their assets for another party's use. 302 CU IDOL SELF LEARNING MATERIAL (SLM)

ACCOUNTING ENTRIES IN THE BOOKS OF LESSOR AND LESSEE. Accounting Entries in the Books of Lessor The Lessor is entitled to receive Royalty from the Lessee. Here royalty would be an income to the Lessor. The entries would therefore be the reverse of those made in the Lessee’s books. However, it may be noted that in place of Short working Account, the Lessor maintains the Royalty Reserve or Royalty Suspense Account. The following are the accounting entries in the books of lessor: (1) When the Royalties are Less than Minimum Rent and Short Workings are Recoverable out of Future Years: (2) When the Royalties Earned Exceed the Minimum Rent and Short Workings are Recovered: 303 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 1: Y Company is a lessee of a mine on a royalty or Re 1 per ton of coal raised with minimum re to R 8.000 per annum with power to recoup short workings during the first two years of the lease only. The output for the first three years is: Pass the necessary journal entries in the books of landlord. 304 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 2: The copy write of a book was held by B Company. C Company was allowed to publish the book on the following terms and conditions: (a) Royalty payable is Rs 3 per book. (b) The Minimum Royalty is fixed at Rs 9,000 p.a. (c) The short workings can be recouped within first five years only. The following are the details of the number of copies published by C Company: 305 CU IDOL SELF LEARNING MATERIAL (SLM)

You are required to prepare Journal entries and Ledger account to record the above transactions in the books of B Company. 306 CU IDOL SELF LEARNING MATERIAL (SLM)

307 CU IDOL SELF LEARNING MATERIAL (SLM)

Accounting Entries in the Books of Lessee The following are the accounting entries passed in the books of lessee: (1) When the Royalty is Less than Minimum Rent and the Minimum Rent Account is not Main- tained: (2) When the Royalty is Less than Minimum Rent and the Minimum Rent Account is Maintained: (3) When Royalties are More than Minimum Rent: 308 CU IDOL SELF LEARNING MATERIAL (SLM)

(4) When Short Working cannot be Recouped in Future: Illustration: 309 CU IDOL SELF LEARNING MATERIAL (SLM)

310 CU IDOL SELF LEARNING MATERIAL (SLM)

N.B. The excess of Minimum Rent over actual Royalty is termed as Short workings. Here, the Lessee has a right to recover the Short workings over the first three years only. Therefore, in the year 2004. Lessee could recover Rs 4,000 out of the Royalty; the balance of Short workings Account amounting to Rs 4,500 (Rs. 6,500 + 2,000 = 8,500 – 4,000 = 4,500) written off to Profit & Loss Account, as the amount is no longer recoverable. 311 CU IDOL SELF LEARNING MATERIAL (SLM)

Entries for 2004 and 2005 are the same, as done. The reason is that in 2004 and 2005 the amounts of Royalties are more than the Minimum Rent. Therefore, Minimum Rent will not be opened. SUMMARY Some business which the owner has a right or monopoly towards some goods or services can allow other firms to exercise the right. The owner will get a gratuity based on how far the rights have been exercised. According to MASB (Malaysian Accounting Standard Board), royalty is the remuneration payable to a person in respect of the use of long term assets such as patent, trademarks, copyrights and computer software. Payment made by the lessee on account of a royalty is normal business expenditure and will be debited to the Royalty account. It is a nominal account and at the end of the accounting year, balance of Royalty account need to be transferred to the normal Trading and Profit & Loss account. Royalty, based on the production or output, will strictly go to the Manufacturing or Production account. In case, where the Royalty is payable on sale basis, it will be part of the selling expenses. KEY WORDS • Gross Revenue Payment: The amount due to the songwriter is a percentage of the total income before taking any other expenses into account. • Net Revenue Payment: Songwriters receive a check based on the income earned after expenses. For example, in the publishing world, writers are paid according to sales of a title only after the cost of printing and marketing have been paid. • Price Per Unit Payment: These are flat amounts paid for a song or a book within a specific format. Songwriters are often due a flat rate amount for each CD sold, and a different amount every time a song is played on the radio. 312 CU IDOL SELF LEARNING MATERIAL (SLM)

• Minimum Rent Payments: This means a minimum amount is paid per month, even if no sales are made. If sales exceed the minimum, a greater amount may be paid. • Royalty Advances: These payments are given to an artist before they are actually earned, meaning that the artist’s percentage of sales then goes towards this amount until the amount is paid off. • Monthly Royalty Expense: Typically, royalty payments accumulate over a few months. Record companies account for the payments owed to their artists by listing monthly royalty expenses within their royalty accounting program. LEARNING ACTIVITY 1. A Company leased a colliery on 1st January, 2007 at a minimum rent of 20,000 merging into a royalty of rs.1.50 per ton with power to recoup short workings over the first four years was 9,000 tons, 12,000 tons, 16,000 tons, 20,000 tons respectively Pass the necessary journal entries for each of the four years in the book of the company. 2. On 1st Jan 1998, The Chitradurg Collieries Ltd. leased a piece of land for a minimum rent of Rs.5,000 in the first year, Rs.10,000 in the second year and thereafter Rs.15,000 per annum, merging into royalty of Rs.2.50 per ton, with power to recoup short-working over the first three years only. The annual output for the four years ending 31st December 2001 was 500, 3,000, 8,000 and 12,000 tons respectively. Show how the accounts would appear in the books of the Colliery Co. UNIT END QUESTIONS A. Descriptive Type Questions Short Answer 1. What is royalty accounting? 2. State meaning of royalty. Long Answer 1) A colliery worked coal under a lease which provided for the payment of royalties at Rs 5 per tonne with a minimum rent of Rs 1,70,000 per annum. Each year’s excess of minimum rent over the actual royalties was recoverable during the subsequent three years. The lease, 313 CU IDOL SELF LEARNING MATERIAL (SLM)

however, stipulated that if in any year the normal rent was not attained due to strike or accident, the minimum rent was to be regarded as having been reduced proportionately having regard to the length of the stoppage. The output was as follows: During the year 2010-11 there was a stoppage due to strike lasting three months. Give the necessary ledger accounts in the books of the colliery for each of the above years. 3. X Ltd. took a right to publish and sell a book from Bharat for 5 years. The minimum rent is ₹20000. Royalty is ₹5 per book. Bharat has allowed a right to recoup the short-workings to the X Ltd. in the first 4 years. The sales in the 5 years are: Year Books sold 1 2500 2 3000 3 4500 4 5000 314 CU IDOL SELF LEARNING MATERIAL (SLM)

5 6000 • Calculate the Royalty payable and short-workings. Also, pass the necessary journal entries in the books of Bharat for 5 years. You are also required to prepare the account of X Ltd. The books are closed on 31st March every year. 3. AB Ltd. got the lease of a colliery on the basis of Rs.5 per tonne of coal raised subject to a Minimum Rent of Rs.1,00,000 p.a. The tenant has the right to recoup short-workings during first four years of the lease and not afterward. Assume that the year ends on 31 December every year. The output in four years was 9000, 13000, 25000, 27000 and 50000 respectively. Give the Journal entries and ledger accounts in the books of AB Ltd. 4. A coal company leased a mine on a royalty of Rs.4 per ton of coal raised with a minimum rent of Rs.15,000 per year. The right to recoup short-workings was out of the surplus royalties during the first three years only. The quantities of coal raised during the first 4 year were 1,200, 2,000, 6,000 & 10,000 tons respectively. Pass journal entries in the books of Coal Company for the above period. 5. Jaya Ltd. owned the patent of safety locks. It granted to X & Company a licence for seven years to manufacture and sell locks on the following terms: a) X & Company to pay Jaya Ltd. a royalty of Rs.5 for each lock sold with a minimum annual payment of Rs.50,000. Accounts to be settled annually on 31st December. b) If in any year royalty calculated on locks sold amounted to less than Rs.50,000 X & Co. to have the right to deduct the deficiency from the royalty payable in excess of that sum in the two following years. c) The number of locks sold was as follows Year ended 31/12/1998 - 8,000; Year ended 31/12/1999 – 9,000; Year ended 31/12/2000 – 11,000; Year ended 31/12/ 2001 – 18,000. You are required to give the Ledger Accounts necessary to record the above royalty transactions in the books of X & Co., which are closed annually on 31st December. B. Multiple Choice Questions 315 CU IDOL SELF LEARNING MATERIAL (SLM)

1) Lessor is the------- 316 a) Owner b) User c) A & B Both d) None of these 2) Lessee is the------- a) Owner b) User c) A & B Both d) None of these 3) Short workings =--------- less Royalty payable a) Minimum Rent b) Capital c) Cash paid d) None of the above 4) The minimum rent can be------- proportionately, if there is a stoppage due to strike. a) Increase b) Decrease c) A & B both d) None of the above 5) In the books of lessee, short working recovered amount is debited to a) Profit & Loss Account b)Minimum rent Account c) Royalty Account CU IDOL SELF LEARNING MATERIAL (SLM)

d) Landlord’s Account 6. When Short-working is recovered, the account to be debited is a) Landlord Account b)Royalty Account c) Short-working d) Minimum Rent 7. Short-working Account shows Balance in the books of Lessee a) Debit Balance b)Credit Balance c) Debit and Credit both d) Zero Balance 8. Short-working provision in Royalty agreement favours a) Lessee b)Landlord c) Lessee and Landlord d) None of these 9. Minimum Rent provision in Royalty Agreement protects the interest of a) Lessee b)Landlord c) Lessee and Landlord d) None of these 10. The minimum rent can be ------- proportionately, if there is a stoppage due to strike a) Decrease b)Increase 317 CU IDOL SELF LEARNING MATERIAL (SLM)

c) Either Increase or decrease d) None of these Answers 1. a 2. b 3. a 4. b 5. a 6.a 7.a 8.a 9.a 10.a REFERENCES • Monga, J.R. (2005). Financial Accounting: Concepts and Applications. New Delhi: Mayor Paper Backs. • Maheshwari, S.N., and Maheshwari, S. K. (2002). Financial Accounting. New Delhi: Vikas Publishing House. • Shukla, M.C. Grewal T.S. and Gupta, S.C. (2016). Advanced Accounts. New Delhi: S. Chand & Co. • R.K. Mittal, M.R. Bansal. (2018). Advanced Financial Accounting. New Delhi: VK Publications. 318 CU IDOL SELF LEARNING MATERIAL (SLM)