Journal Entries and Ledger Accounts Including Minimum Rent Account

08/07/2020 1 By indiafreenotes

Applying Minimum Rent Account Method:

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.

The results of working of the property are:

Interpretation:

1998: As there was no royalty, the whole amount is treated as short-working and the same is carried forward.

1999: Actual royalty is less than the minimum rent by Rs. 6,700 (Rs. 10,000 – Rs.3, 300) and the same is again carried forward. Total amount of short-working was Rs. 16,700 (i.e., Rs. 10,000 + Rs. 6,700)

2000: Again there was a short-working of Rs. 1,000 (Rs. 10,000 – Rs. 9,000) which was again carried forward. Now, the balance of short-working was Rs. 17,700.

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, there was a balance of Rs. 4,900 (Rs. 10,000 – Rs. 1,100 – Rs. 4,000) for 1998.

2003: In this year also, actual royalties are more than the minimum rent by Rs. 5,000 (Rs. 15,000 – Rs. 10,000) which should be recouped against the un-recoupable part of short-workings of 1998 i.e., Rs. 4,900 and Rs. 100 should be recouped against the short-working of Rs. 1,999.