BCOM 1st Year Royalties Accounts Long Question Answer Notes

BCOM 1st Year Royalties Accounts Long Question Answer Notes :- BCOM 1st Year Study Material Notes Sample Model Papers Notes examination paper also available unit wise Chapter wise Syllabus of the content chapter wise notes. available in over site parultech.com

Section B

LONG ANSWER QUESTIONS

Q.1. What journal entries are passed relating to rovalties in the books of lessee and landlord?

Ans. Journal Entries in the Books of Lessee

In the books of lessee, accounting entries in different cases are passed as follows:

(A) Case 1: When Royalty is Less than Minimum Rent

1. When royalty is payable:

Royalty A/C Dr.

S.W.A/C Dr.

To Landlord A/C

(Being royalty earned and shortworkings to be payable to the landlord)

2. When payment of royalty is made:

Landlord A/c Dr.

To Bank A/C

(Being amount paid to landlord)

3. For closing royalty account at the end of the year:

P&L A/C Dr.

To Royalty

(Being the amount of royalties transferred to P&L A/C)

(B) Case II: When Royalty is equal to minimum rent

1. When royalty is payable:

Royalty A/C Dr.

To Landlord A/C

(Being royalties earned and payable to landlord)

2. When amount of royalty is paid:

Landlord A/C Dr.

To Bank A/C

(Being payment made to landlord)

3. When royalty account is closed at the end of year:

P&LA/C Dr.

To Royalty A/C

(Being the transfer of royalties to P & L A/C)

(C) Case III: When Royalty is More than Minimum Rent

1. When royalty is payable:

Royalty A/C Dr.

To Landlord A/C

(Being royalties earned and payable to landlord)

2. For writing off shortworking, if any

Landlord A/C Dr.

To Shortworkings A/C

(Being recoupment of S.W. of earlier year)

3. For payment of royalty is made:

Landlord A/C Dr.

To Bank A/c

(Being payment made to landlord) In place of above 2. and 3. entries following one entry may be passed; .

Landlord A/C Dr.

To Bank A/C

To Shortworkings A/C

(Being recoupment of S.W. to the extent of* ___ and balance paid to landlord)

4. For closing royalty account at the end of the year:

P&L A/c Dr.

To Royalty A/C

(Being amount of royalties transferred to P&L A/c)

Note: When royalty is payable monthly, quarterly or half-yearly, royalty will be transferred to profit & loss not when the royalty is paid but at the end of each year.

Journal Entries in the Books of Landlord

(A) Case I: When Royalty is Less than Minimum Rent

1. At the time when royalty is receivable:

Lessee A/C Dr.

To Royalty receivable A/c

To Royalty reserve A/C

(Being the amount of royalty receivable earned and diff. between minimum rent and royalty receivable transferred to royalty reserve A/c)

2. When above amount is received:

Bank A/c Dr.

To Lessee A/C

(Being the amount received from lessee)

3. For closing royalty receivable account:

Royalty receivable A/c Dr.

To P&L A/C

(Being amount of royalty receivable transferred to P&L)

(B) Case II: When Royalty Receivable is Equal to Minimum Rent

1. At the time when royalty is receivable:

Lessee A/C Dr.

To Royalty receivable A/c

(Being the royalty receivable earned)

2. On receipt of the amount:

Bank A/C

To Lessee A/C

(Being the amount received from lessee)

3. For closing royalty receivable account:

Royalty receivable A/C Dr.

To P&L A/C

(Being transfer of royalty receivable A/c to P&L A/C)

(c) Case III:When Royalty is More than Minimum Rent:

1. At the time when royalty is receivable:

Lessee A/C

To Royalty receivable A/C

(Being the amount of royalty receivable earned)

2. For writing of royalty reserve A/c

Royalty reserve A/C Dr.

To Lessee A/C

(Being royalty reserve recouped)

3. On receipt of royalty amount:

Bank A/C Dr.

To Lessee A/C

(Being amount received from lessee)

Combined entry may be passed for 2. and 3. above. Bank A/C Dr.

Royalty reserve A/C Dr.

To Lessee A/C

(Being amount received and royalty reserve recouped)

4. For closing royalty receivable account:

Royalty receivable A/C

To P&L A/C

(Being transfer of royalty receivable A/c to P & L A/c)

Q. 2 What is shortworking? How does it arise? What are the rules of accounting in this connection?

Ans. Shortworking: Refer to Section-A, Q.5.

Important Points Regarding Shortworking

1. Recoupment of Shortworking: It is clear from the above discussion that a minimum rent is paid to the owner of the right when the amount of royalty is less than the minimum payment and thus the owner is saved from loss. But in such a case, the payer of the minimum rent will cm. some loss. It is, therefore, generally provided in the agreement that the transferee will have a rin recovering or recouping the shortworkings in some coming years. The right of recoupment is legal binding but a mutual agreement. Both the parties will decide the number of years upto the shortworking may be recovered. Following examples will clarify the recoupment of shortworki

(a) Shortworking can be recouped out of the excess royalty of the first five years. It means that if the agreement is signed on 1st April, 2007, the shortworking can be recouped upto 37 March, 2012

(b) Shortworking can be recouped in the next, subsequent or following year only. It means the the shortworking of 2007-08 may be recouped only in the year 2008-09 and not beyond Beyond that.

For example: Suppose the minimum rent is 50,000 per annum and according to the agreement the shortworking can be recouped only in next one year. In 2005-06 and 2006-07, the royalty was 20,000 and 60,000 respectively. Therefore, in 2005-06 there was a shortworking of 30,000. In 2006-07 onlu 10,000 can be recouped. If a shortworking of more than 10,000 is recouped in 2006-07, the amount of payment will be below the minimum rent of 50,000 which will not be accepted by the owner.

2. No Right of Recoupment: It may also be decided in the agreement that there will be a provision of minimum rent but the transferee will have no right to recoup the shortworking. In such a case, an irrecoupable shortworking account is opened which is transferred to P & L account in the same year in which it is opened.

3. No Provision of Minimum Rent: Sometimes a minimum rent is not fixed in the agreement. In that case, the actual royalty is to be paid. When there is no condition of minimum rent, there arises no question of shortworkings. Generally, in copyright royalty, there is no provision regarding the minimum payment in the agreement between an author and the publisher.

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Rules of Accounting

Analysis Table: Before accounting for royalty, one must have a clear knowledge of the amount of royalty, minimum rent, shortworking or excess working and also the recoupment of shortworking. Therefore, before solving the question, an analysis table must be prepared by the students in the examination as follows: