Special terminologies in Royalty Accounts Landlord, Tenant, Output, Minimum Rent/Dead Rent, Short Workings, Recoupment of Short Workings30th March 2021
Landlords are the persons who have the legal rights on mine or quarry or patent right or copybook rights.
An Author or publisher; lessee or patentor who takes out rights (usually commercial or personal rights) from the owner on lease against the consideration is called tenet.
Minimum Rent/Dead Rent
Minimum rent can be a fixed sum for every year or may change every year as per the terms of the agreement.
- When the actual royalty for a year is less than the minimum rent, the lessee will pay the minimum rent to the lessor.
- When the actual royalty for a year is more than the minimum rent, the lessee will pay the actual royalty to the lessor.
According to the lease agreement, minimum rent, fixed rent, or dead rent is a type of guarantee made by the lessee to the lessor, in case of shortage of output or production or sale. It means, lessor will receive a minimum fix rent irrespective of the reason/s of the shortage of production.
Payment of royalty will be minimum rent or actual royalty, whichever is higher for example”
M/s Calicut publication printed a book on Java on the minimum rent of Rs. 1,000,000/- per annum royalty being payable @ Rs. 20 per book sold. In the first year of publication, Hyderabad publication sold 75,000 copy of the books and in the second year, number of sold books fell down to 45,000 only. Amount of royalty will be payable as under:
|Minimum Rent||Royalty Payable|
75,000 Books X Rs. 20 per book = Rs. 15,00,000
45,000 Books X Rs. 20 per book = Rs. 9,00,000
Difference of minimum rent and actual royalty is known as shortworkings where payment of Royalty is payable on the basis of minimum rent due to shortage in the production or sale. For example, if calculated royalty is Rs. 900,000/- as per sale of books based on the above example, but royalty payable is Rs. 1000,000 as per minimum rent, shortworking will be Rs. 100,000 (Rs. 1,000,000 – Rs. 9,00,000).
Recoupment of Short Workings
It may contain in the royalty agreement that excess of minimum rent paid over the actual royalty (i.e. shortworkings), may be recoverable in the subsequent years. So, when the royalty is in excess of the minimum rent is called the right of recoupment (of shortworkings).
Right of recoupment will be decided for the fixed period or for the floating period. When the right of recoupment is fixed for the certain starting years from the date of royalty agreement, it is said to be fixed or restricted. On the other hand, when the lessee is eligible to recoup the shortworkings in next 2 or 3 years from the year of its commencement, it is said to be floating.
Shortworking will be shown on the asset side of Balance sheet up to allowable year of recouping after that it will be transferred to profit & loss account (after expiry of allowable period).
- Fixed Right of Recoupment: When the lessor allows the lessee to adjust the short-workings only for a fixed period of time, it is known as Fixed Right of Recoupment.
- Floating Right of Recoupment: When the lessor allows the lessee to adjust the short-working of any year in the next two or three years, it is known as the Floating Right of Recoupment.
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