recoupement of shoryment in susequent two years means starting from first year or next year
Answers
Minimum Rent:
Usually, the royalty agreements contain a clause for the payment of a fixed minimum amount to the lessor every year as royalty—irrespective of the actual benefit to be taken by the lessee—simply in order to assure the lessor of a certain regular income from his property.
This minimum amount is known as “Minimum Rent, ‘Dead Rent’, etc. It is to be remembered that the Minimum Rent may or may not vary in different years. The Minimum Rent or actual royalty, whichever is higher, is to be paid to the lessor. For example, X leased a mine from Y at a Minimum Rent of Rs. 12,000 p.a. merging a royalty of Rs. 2 per ton of coal raised.
Now, if the quantity raised for the 1st year amounted to 4,000 tons and that of 2nd year 8,000 tons, in that case, X will have to pay Rs. 12,000 for the 1st year to Y, i.e., the Minimum Rent [since actual royalty (8,000 = 4,000 × 2) is less than Minimum Rent]. On the contrary, he will have to pay Rs. 16,000 to Y for the 2nd year [since actual royalty (16,000 = 8,000 × 2) is more than the Minimum Rent.].
3. The short-working which is recouped is to be shown as current asset in the asset side of the Balance Sheet.
4. The recoupable part of short-working should be transferred to Profit and Loss Account.
5. Royalty based on output should be debited to Manufacturing Account or Production Account and royalty based on sales should be debited to Trading Account or Profit and Loss Account.
Recognition of Royalty as a Revenue Ind AS-18:
As per Ind AS-18, Revenue Recognition, revenues arising from the use by others of enterprise recourses yielding interest, royalties and dividends should only be recognised when no significance uncertainty as to measurability or collectability exists.
These revenues are recognised on the following basis:
In case of Royalty:
On the Accrual Basis in accordance with the terms of the relevant agreement.
It becomes clear from the above that royalty receivable should be recognised as revenue.
Ordinary:
Illustration 1:
Bengal Coal Ltd. got the lease of a colliery on the basis of 50 paise per ton of coal raised subject to a Minimum Rent of Rs. 20,000 p.a. The tenant has the right to recoup short-workings during first four years of the lease and not afterwards. The output in four years was 1st year-18,000 tons. 2nd year—26,000 tons. 3rd year—50,000 tons. 4th year—60,000 tons. 5th year—1, 00,000 tons. You are required to give the Journal entries and ledge
Applying Minimum Rent Account Method:
M. Ltd leases a property from Sri D. Poddar at a royalty of Rs. 1.50 per ton with a Minimum Rent of Rs. 10,000 p.a. Each year’s excess of Minimum Rent over royalties are recoverable out of royalties of next five years.
2001— Actual royalty is more than the minimum rent by Rs. 1,100 (Rs. 11,100 – Rs. 10,000) and the short-working were recoup by the like amount out of Rs. 10,000 of 1998.
Here, recoupment terms are very important. As per question, excess royalties are recoverable out of royalties of next five years. The word next is very significant here. It means, short-workings of first year should be recouped against the excess royalty of 2nd, 3rd, 4th, 5th and 6th year. Similarly, short-working of 2nd year should be recouped against the excess royalties of 3rd, 4th, 5th, 6th and 7th year and so on.
2002— So, again, as actual royalty is more than the minimum rent by Rs. 4,000 (Rs. 15,000 – Rs. 10,000) it should be recouped against the un-recoupable part of short-working of 1998. Still,
(a) Royalty of Rs. 10 per chair sold,
(b) Minimum Rent of Rs. 15,000 p.a
Minimum Rent Rs. 15,000 and actual royalties were Rs. 9,000. So there was a short-working of Rs. 6,000 (which was transferred to Royalty Suspense A/c)
Again there was a short-working of Rs. 2,000 (Rs. 15,000 – Rs. 13,000). So, total amount of short-working amounted to Rs. 8,000 (Rs. 6,000 + Rs. 2,000) which was carried forward.
This year is very important. In this year, there was an excess of Rs. 5,000 which could be recouped. But, as per question, maximum amount of recoupment should be Rs. 3,500. Hence, Rs. 2,500 (Rs. 6,000 – Rs. 3,500) should be credited to Profit and Loss Account as the lease agreement provided that short-working could be recouped only within two following years in which the short-working occurred.
Again, there was a short-working amounting to Rs. 1,000 which should be credited to P & L A/c as the contract was made for 5 years i.e., there was no chance for recoupment.
B. Where there is no Minimum Rent?
Under the circumstances, there will not be any short-working; as such question of recoupment of short-working also will not arise at all. Landlord is entitled to get the actual royalties only.
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