BCOM 1st Year Royalties Accounts Short Question Answer Notes

Q.6. Explain the following terms:

1. Sub-lease.

2. Nazrana.

3. Recoupment or writing of shortworkings.

Ans. 1. Sub-lease: If the royalty agreement so allows, a lessee can transfer either the whole or a part of his right under the agreement to other to others with or without minimum rent and shortworking clause. This transfer is known as sub-lease and the person to whom such transfer is made is known as sublessee. It is to be noted that royalty rates, amount of minimum rent and terms of recoupment of past shortworkin under sub-lease may be same or materially differ from the terms in original agreement. wortworking under sub-lease may be same or materially differ from the terms in original agreement. Usually royalty rates under sub-lease may be same or materially differ from the terms in original lease. In Such a case of sub-lease, whatever yield is taken out by the lessee and sub-lessee is totalled up and on this total yield leassee has to pay royalty to the landlord. Here, it is important to note that lessor’s agreement is with lessee, he is not concerned with sub-lease, although sub-lease to sub-lessee is granted with the permission of the lessor.

2. Nazrana: Sometimes the landlord requires the lessee to pay a certain amount in one lump sum in the beginning of lease in addition to periodic royalty. Such payment is called ‘Nazrana’ or ‘Premium.’

The amount of nazrana is paid only once during the period of lease. Hence, in practice it is a called as ‘Pagri’. In fact, it is an additional advance payment of royalty, hence, it should be treated *** capital expenditure and should be written off equally each year during lease period. For this purpo nazrana account is opened in the books of the lessee and whole of the amount of nazrana is debiter in nazrana account in the first year of payment and whole of the amount of nazrana is divided by the period of lease, the amount so arrived at is credited to nazrana account every year.

3. Recoupment or Writing of Shortworking: There are no legal provisions for writing off short. workings, all the conditions regarding recoupment or writing off shortworkings are based on the mutual agreement. Shortworking occurs due to the provision of minimum rent in the royalty agreement. If royalty agreement does not contains clause of minimum rent, the question of shortworking and their recoupment will not arise. Similarly, if no shortworking exists, then also the question of recoupment will not arise. If the lessee has been given the right of recoupment of shortworkings under the agreement, then it may be of the following types:

(a) Shortworkings may be recouped in all the future years or it may be recouped throughout the period of lease; and (b) It may be recouped during the first some specified years (first four or five years). In the case of four years, recoupment will take place only during first four years and not afterwards.

(c) Each year’s shortworking can be recouped in the following or next some specified years (next two years or three years or any other period).

(d) Shortworking will not be recouped in future years, etc.

Q.7. Write a short note on shortworking reserve account.

Ans. It is generally mentioned in royalty agreement that shortworkings can be recouped in a certain number of years. Suppose shortworkings can be recouped in the first four years of the lease. In such case, if the shortworking of the first year is so heavy that it could not be recouped upto 4 years, the unrecouped portion of shortworkings of the first year will be transferred to profit & loss account of the fourth year. There is one defect in this type of treatment that profit & loss account of first year, in which there was shortworking, is not affected, but profit & loss account of that year is affected in which it is to be recouped, in this case it is fourth year. Thus, the loss of first year is charged in the fourth year in this case. For removing this defect, shortworking reserve account is opened.

1. For creation of shortworking reserve:

P&L A/C Dr.

To S.W. Reserve A/C

(Being creation of S.W. reserve)

2. For writing off shortworkings:

S.W. Reserve A/C Dr.

To P & L A/C

(Being transfer of recouped S.W. to P & LA/C)

3. In the last ye r of recoupment of shortworkings, if shortworking is unrecoupeu, unrecouped shortworking is transferred to shortworking reserve A/c:

S.W. Reserve A/C Dr.

To S.W.A/c

(Being transfer of unrecouped S.W.)

Q.8. Explain shortworking recoverable and shortworking irrecoverable. (2015)

Ans. Shortworking Recoverable: If the lessee has a right to recoupe the shortworking out of the Tuis then this shortworking is called shortworking recoverable.

Shortworking Irrecoverable: If the lessee has no right to recoupe the shortworking then this ount of shortworking is called shortworking irrecoverable. Such shortworking, when arise, is transferred to the profit & loss and it is considered loss for the year.

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BCOM 1st Year Royalties Accounts Short Question Answer Notes

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