Without Minimum Rent Account under fixed and Floating Recoupment Methods

Last updated on 15/10/2024 1 By indiafreenotes

Minimum Rent or Dead Rent is often used to ensure that the landlord (lessor) receives a guaranteed payment. However, some situations might not involve directly maintaining a Minimum Rent Account but still involve accounting for short workings and recoupment. Recoupment methods can vary, but the two most common are Fixed Recoupment and Floating Recoupment.

Fixed Recoupment Method:

Under the Fixed Recoupment Method, the lessee is allowed to recoup short workings only within a fixed period (e.g., two or three years). If the short workings are not recouped within this period, the lessee loses the right to recover them.

Example:

  • Minimum Rent: ₹100,000
  • Actual Royalty (Year 1): ₹80,000 (Short Workings: ₹20,000)
  • Actual Royalty (Year 2): ₹120,000 (Recoupment of ₹20,000 from Year 1)
  • Actual Royalty (Year 3): ₹90,000 (Short Workings: ₹10,000)

In this method, the lessee can only recoup the short workings from Year 1 within a fixed period (e.g., two years).

Journal Entries in the Books of the Lessee (Fixed Recoupment Method)

Year 1: Actual Royalty is Less than Minimum Rent (Short Workings)

Date Particulars Debit (₹) Credit (₹)
Year 1 Royalty Account Dr. 80,000
To Lessor’s Account 80,000
(Being actual royalty payable to lessor)
Short Workings Account Dr. 20,000
To Lessor’s Account 20,000
(Being short workings transferred)
Lessor’s Account Dr. 100,000
To Bank Account 100,000
(Being payment made to lessor)

Year 2: Actual Royalty Exceeds Minimum Rent (Recoupment of Short Workings)

Date Particulars Debit (₹) Credit (₹)
Year 2 Royalty Account Dr. 120,000
To Lessor’s Account 120,000
(Being actual royalty payable to lessor)
Short Workings Recouped Account Dr. 20,000
To Short Workings Account 20,000
(Being short workings recouped from Year 1)
Lessor’s Account Dr. 120,000
To Bank Account 120,000
(Being payment made to lessor)

Year 3: Short Workings Again

Date Particulars Debit (₹) Credit (₹)
Year 3 Royalty Account Dr. 90,000
To Lessor’s Account 90,000
(Being actual royalty payable to lessor)
Short Workings Account Dr. 10,000
To Lessor’s Account 10,000
(Being short workings transferred)
Lessor’s Account Dr. 100,000
To Bank Account 100,000
(Being payment made to lessor)

Ledger Accounts in the Books of the Lessee (Fixed Recoupment Method)

  1. Royalty Account
Date Particulars Debit (₹) Credit (₹)
Year 1 Lessor’s Account 80,000
Year 2 Lessor’s Account 120,000
Year 3 Lessor’s Account 90,000
  1. Short Workings Account
Date Particulars Debit (₹) Credit (₹)
Year 1 Lessor’s Account 20,000
Year 2 Short Workings Recouped Account 20,000
Year 3 Lessor’s Account 10,000
  1. Lessor’s Account
Date Particulars Debit (₹) Credit (₹)
Year 1 Royalty Account 80,000
Year 1 Short Workings Account 20,000
Year 1 Bank Account 100,000
Year 2 Royalty Account 120,000
Year 2 Bank Account 120,000
Year 3 Royalty Account 90,000
Year 3 Bank Account 100,000
  1. Short Workings Recouped Account
Date Particulars Debit (₹) Credit (₹)
Year 2 Short Workings Account 20,000
  1. Bank Account
Date Particulars Debit (₹) Credit (₹)
Year 1 Lessor’s Account 100,000
Year 2 Lessor’s Account 120,000
Year 3 Lessor’s Account 100,000

Floating Recoupment Method

Floating Recoupment Method, the lessee can recoup short workings from any future period as long as the actual royalties exceed the minimum rent. This method provides greater flexibility compared to the fixed method, as there is no time restriction on recoupment.

Example:

  • Minimum Rent: ₹100,000
  • Actual Royalty (Year 1): ₹80,000 (Short Workings: ₹20,000)
  • Actual Royalty (Year 2): ₹90,000 (Short Workings: ₹10,000)
  • Actual Royalty (Year 3): ₹120,000 (Recoupment of ₹30,000 from Year 1 and Year 2)

Journal Entries in the Books of the Lessee (Floating Recoupment Method)

Year 1: Actual Royalty is Less than Minimum Rent (Short Workings)

Date Particulars Debit (₹) Credit (₹)
Year 1 Royalty Account Dr. 80,000
To Lessor’s Account 80,000
(Being actual royalty payable to lessor)
Short Workings Account Dr. 20,000
To Lessor’s Account 20,000
(Being short workings transferred)
Lessor’s Account Dr. 100,000
To Bank Account 100,000
(Being payment made to lessor)

Year 2: Actual Royalty is Less than Minimum Rent Again (Short Workings Continue)

Date Particulars Debit (₹) Credit (₹)
Year 2 Royalty Account Dr. 90,000
To Lessor’s Account 90,000
(Being actual royalty payable to lessor)
Short Workings Account Dr. 10,000
To Lessor’s Account 10,000
(Being short workings transferred)
Lessor’s Account Dr. 100,000
To Bank Account 100,000
(Being payment made to lessor)

Year 3: Actual Royalty Exceeds Minimum Rent (Recoupment of Short Workings)

Date Particulars Debit (₹) Credit (₹)
Year 3 Royalty Account Dr. 120,000
To Lessor’s Account 120,000
(Being actual royalty payable to lessor)
Short Workings Recouped Account Dr. 30,000
To Short Workings Account 30,000
(Being short workings recouped from previous years)
Lessor’s Account Dr. 120,000
To Bank Account 120,000
(Being payment made to lessor)