Unit V
Royalties Accounts
Some business which the owner has a right or monopoly towards some goods or services can allow other firms to exercise the right. The owner will get a gratuity based on how far the rights have been exercised.
In other words, i is a transaction whereby an owner gives a right to other company or user to use his/her own properties, and in return, the user will then give a Compensation or payment which is known as royalty.
According to MASB (Malaysian Accounting Standard Board). royalty is the remuneration payable to a person in respect of the use of long term assets such as patent, trademarks, copyrights and computer software.
The main forms of royalty-
(a)Mining royalty - To extract mineral and ore from earth
(b)The book publisher gives gratuity to the author / writer
(c) For the use of a design
Royalty Agreement:
A royalty agreement will normally contain causes dealing with the following:
a) Minimum rent - Guaranteed amount which the land lord, inventor or author is to receive whatever the output maybe.
b) Royalty per unit per output
c) Right to recoup short-workings
d) Right to subject part or whole of tenancy agreement
Minimum Royalty and Shorn Workings:
The payment of loyalty is based on the unit of output produced. However, if the sum of myaty is kss than the minimum rent (if any), then the payment will be based on
the minimum rent (minimum royaty - minimum rent).
The difference between the royalty and the minimum rent is known as "Short
Working'. Normally, the tenant may obtain the right to recover the short-workings.
Example 1: Royalty without any minimum rent
A landlord granied a kase to mining company whereby he is to receive RMO.05 per ton of ore mined.
The output for the first 3 years is:
Ist year
2nd year
3rd year
10,000 tons
20,000 tons
24,000 tons
Solution
The landlord will receive the royahy of:
Ist year
2nd year
3rd year
(10,000 x RMO.05)
(20,000 x RMO.05)
24.000 x RMO.05)
RM 500
RMI.000
RMI200
RM2,700
Example 2: With a minimum rent- also with the rights to recoup short-workings A landlord granted a ease to mining company whereby he is to receive RMO.05 per ton of ore mined.
The output for the first 3 years is:
Ist year
2nd year
3rd year
Assume that the minimum rent is RM800.
Solution
10,000 tons
20,000 tons
24,000 tons
