UNIT IV
Accounting for Leases
Q1) What is a lease? Explain its benefits.
A1) A lease is a contract that allows an asset / asset owner to use the asset / asset in exchange for something, usually money or other asset, by another party. The two most common types of leases in accounting are operating leases and finance (capital leases) leases. This step-by-step guide covers all the basics of lease accounting.
Benefits of leasing
Q2) What is a finance lease?
A2) Finance leasing is a way of providing finance. In effect, a leasing company (lessor or owner) buys asset for a user (usually called an employer or lessee) and rents them to them for an agreed period of time.
Finance leases are a statement of Standard Accounting Practice 21.
"Practically all risks and rewards of ownership of an asset to a lessee."
This basically means that the lessee is in much the same position as if he had bought the asset.
The lessee pays a rent that covers the original cost of the asset during the initial or major period of the lease. You are obliged to pay all of these rents, including balloon payments at the end of the contract. When all of this is paid, the lender will recover the investment in the asset.
The customer promises to pay these rents during this period and technically the finance lease is defined as non-cancellable, although it may be possible to terminate early. At the end of the lease
What happens at the end of the primary finance lease term is different and depends on the actual contract, but the possible options are:
When an asset is sold, the customer may be given a rent rebate equivalent to the majority of the sale price (minus disposal costs), as agreed in the lease agreement. If the asset is held, the lease enters the second period.
Secondary rentals can be much lower than primary rentals (“pepper cone” rentals). Alternatively, the same rental may continue to be leased monthly.
Q3) Give an example of Finance lease.
A3) Finance lease example
Finance leases are commonly used to finance vehicles, especially hard-working commercial vehicles. The company wants the benefits of leasing, but does not want the responsibility to return the vehicle to the lender in good condition.
Besides commercial vehicles, finance leases can be used for many other assets. An example is shown below.
The Health Club was considering investing in new gym equipment. The total loan amount is £ 20,000 and the contract is set to pay for 60 months without deposits. Importantly, the balloon payment was set to £ 0. This means that the client (or most likely a gym user!) Is free to sweat the device, knowing that they are not responsible when concluding the contract. After 60 months the option is to sell the equipment – keep the money made or enter the peppercorn (secondary) rental period in a relatively small amount.
Q4) Define Operating lease
A4) In contrast to finance leases, operating leases do not transfer virtually all risks and rewards of ownership to the lessee. It usually runs for less than the full economic life of the asset, and the lessor expects the asset to have resale value (known as residual value) at the end of the lease term.
This residual value is predicted at the beginning of the lease and the lessor bears the risk of whether the asset will achieve this residual value at the end of the contract.
Operating leases are common when assets such as aircraft, vehicles, construction plants, and machinery have residual value. Customers can use the asset for the agreed term in exchange for rent payment. These payments do not cover the full cost of the asset as in the case of a finance lease.
The operating lease may include other services included in the contract. Vehicle maintenance contract.
Ownership of the asset remains with the lessor and the asset is returned at the end of the lease when the leasing company rehires it under another contract or sells it to release the residual value. Alternatively, the lessee may continue to rent the asset at the fair market rent agreed at that time.
Accounting rules are currently under consideration, but at this time operating leases are off-balance sheet arrangements and finance leases are on the balance sheet. For accounting under international accounting standards, IFRS 16 will bring operating leases to the balance sheet. Learn more about IFRS16.
A common form of operating lease in the vehicle sector is contract employment. This is the most common way to fund company cars and is growing steadily.
Q5) Why choose one sort of lease over the other?
A5) This is a complex question, and each asset investment needs to be considered individually to see which type of financing is most beneficial to the organization. However, there are two important considerations. The type and lifetime of the asset, and the way the leased asset is reflected within the organization's account.
Asset type and lifespan
As mentioned above, it is important to remember that in operating leases the risks and rewards of owning an asset remain with the lessor, and in finance leases these are primarily transferred to the lessee.
Very generally, if an asset has a relatively short service life within the business, an operating lease may be a more commonly selected option before it needs to be replaced or upgraded. This is because the asset is likely to hold a significant portion of its value at the end of the contract, thus lowering the rent during the lease term. This is priced to the overall cost of the contract, as the lessor bears the risk in terms of the residual value of the asset.
This “cost of risk” can be significantly reduced for assets that can affect their condition at the time of return to the lessor and therefore have a high degree of certainty in estimating the residual value. Asset types to which this applies include automobiles, commercial vehicles, and IT equipment.
If an asset is likely to have a longer useful life in the business, its residual value consideration is less important as it is likely to be a much smaller percentage of its original value. This may mean that the lessee is willing to take this risk internally rather than paying the lessor. Here, finance leasing is a more obvious choice.
Because the rent paid on a finance lease pays off all or most of the capital, it is often possible to set a secondary lease period and maintain the use of the asset at a significantly reduced cost.
Q6) Difference between Financial Leasing and Operating Leasing
A6) As you can see, there are some differences between financial and operating leases. Let's look at the important differences between them –
Q7) Define Hire Purchase System
A7) If you purchase a TV for cash, you pay, say, Rs. 15,000. But if you wish to make the payment by instalments of say, Rs. 3,000 each, every year, you may be required to pay four instalments, that is Rs. 20,000 in all. The extra amount of Rs. 3,000 is for interest. If you choose the latter mode of the payment, you should debit Rs. 5,000 to interest and treat the TV as valued at Rs. 15,000 (and not at Rs. 20,000). In case payment is to be made by instalments, there may be two kinds of arrangements. Each instalment may be treated as a ‘hire’ the purchaser becoming the owner only if he pays all the instalments. In other words, property does not pass to him even if one instalment remains unpaid. The seller will have the right to take away the goods in case of default in respect of any instalment. This is known as ‘Hire Purchase’ system.
The other arrangement may be that property passes immediately on the signing of the contract. The seller will not have the right to repossess the goods in case an instalment is not paid. His right will be to sue the purchaser for the money due. This is known as the Instalment System.
Q8) What are the Benefits of Employment Purchase and Installment Systems?
A8) 1. Rental purchase and installment payment schemes allow buyers to purchase items that are out of reach.
2. It also allows businesses to find buyers for their products. Companies are not always able to find a cash party for products that are inherently expensive.
3. It expands the market.
4. Middlemen are excluded
5. It helped financial companies develop their business. Today's financial companies are widely funding several articles under the job purchase and installment payment system.
6. The price will be stable.
7. By renting and selling convenient items and luxury items in instalments, people's living standards will improve.
8. Sellers can increase their sales. In addition, rental purchases and installment sales are more profitable.
9. Nowadays, most business houses offer many offers, like free gifts, exclusively for rental purchase customers.
Q9) Explain disadvantages of employment purchase and installment payment system
A9) 1. Employment purchase and installment payment systems tempt buyers to purchase products that go beyond their means. So, it will be a luxury.
2. The buyer pays a very high price for the article under such a scheme. This is because he has to pay interest on his unpaid balance.
3. The need for time is a savings. Plans like buying jobs waste people.
4. Employment purchase price is higher than cash price. Interest is charged to the purchaser of the employment purchase system. Interest rates are often high.
5. If the buyer fails to pay, the goods sold in the rental purchase system will be reclaimed by the rental vendor. Buyers incur huge losses on seized goods.
6. Employment purchases and installment transactions are tedious. You need to conclude a contract and give a guarantee. More legal proceedings are to be passed.
7. The default rate under the employment purchase and installment payment system is higher. This is because only people with inadequate means buy under this system.
8. The purchaser must carry out some legal proceedings. He may have to find a guarantor. The contract must be prepared and signed by both the seller and the buyer, and it must be witnessed. The ownership document remains with the vendor / financial company until the employer liquidates the membership fee.
Q10) Write note on Royalty.
A10) Royalty must be paid by the user to the owner of the property or to which the owner has special rights. Royalty agreements are created between the owner and the user of such property or right. When payments are made to purchase rights or assets that are treated as capital expenditures rather than royalties.
Payments made by the lessee for royalties are normal business expenses and are deducted from the royalties’ account. This is a nominal account and at the end of the fiscal year you need to transfer the balance of your royalty account to your regular trading and profit and loss accounts. Loyalties are sent strictly to the manufacturing or production account based on the production or production. If royalties are paid on a sales basis, it will be part of the selling cost.
Q11) What are the types of Royalty?
A11) There are the following types of royalties-
Copyright-Copyright provides legal rights to the author (of his book), the photographer (of his photographs), or any such type of intellectual work. The copyright royalties must be paid by the publisher (borrower) to the author (lender) or photographer of the book based on the sale by the publisher.
Mining royalties-Mine or quarry lessees pay mine or quarry lenders. This is usually based on production volume.
Patent royalties-Patent royalties are paid by the lessee to the lessor based on the production or production of each item.
Q12) AB Ltd. has acquired a mine lease based on Rs.5 per ton of coal procured, subject to a minimum rent of Rs.1,00,000 p.a. Tenants have the right to regain short-term work for the first four years of the lease, not thereafter. Suppose the year ends on December 31st of each year.
The four-year production was 9000, 13000, 25000, 27000 and 50000, respectively. Enter journals and ledger accounts in AB Ltd.’s books.
A12) Calculation of royalties, minimum rent, short-term work.
Year | Quantity in tonnes | Rate per tonne | Royalty | Minimum Rent | Short-workings |
1 | 9000 | 5 | 45000 | 100000 | 65000 |
2 | 13000 | 5 | 65000 | 100000 | 45000 |
3 | 25000 | 5 | 125000 | 100000 |
|
4 | 27000 | 5 | 135000 | 100000 |
|
5 | 50000 | 5 | 250000 | 100000 |
|
Computation of Recoupment, Short-workings carried forward, Transferred to P&L Account
Year
| Recoupment | Short-working carried forward | Transferred to P&L Account | Payment to Lessor |
1 |
| 65000 |
| 100000 |
2 |
| 100000 |
| 100000 |
3 | 25000 | 75000 |
| 100000 |
4 | 35000 |
| 40000 | 100000 |
5 |
|
|
| 250000 |
Journal Entries Year: 1
Date | Particular |
| Amount (Dr.) | Amount (Cr.) |
31 Dec | Royalty A/c | Dr. | 45000 |
|
| Short-workings A/c | Dr. | 65000 |
|
| To Lessor A/c |
|
| 100000 |
| (Being payment due) |
|
|
|
31 Dec | Lessor A/c | Dr. | 100000 |
|
| To Bank A/c |
|
| 100000 |
| (Being amount paid) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 45000 |
|
| To Royalty A/c |
|
| 45000 |
| (Being amount charged to relevant a/c) |
|
|
|
Journal Entries Year 2
Date | Particular |
| Amount (Dr.) | Amount (Cr.) |
31 Dec | Royalty A/c | Dr. | 65000 |
|
| Short-workings A/c | Dr. | 45000 |
|
| To Lessor A/c |
|
| 100000 |
| (Being payment due) |
|
|
|
31 Dec | Lessor A/c | Dr. | 100000 |
|
| To Bank A/c |
|
| 100000 |
| (Being amount paid) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 65000 |
|
| To Royalty A/c |
|
| 65000 |
| (Being amount charged to relevant a/c) |
|
|
|
Journal Entries Year 3
Date | Particular |
| Amount (Dr.) | Amount (Cr.) |
31 Dec | Royalty A/c | Dr. | 125000 |
|
| To Short-workings A/c |
|
| 25000 |
| To Lessor A/c |
|
| 100000 |
| (Being payment due) |
|
|
|
31 Dec | Lessor A/c | Dr. | 100000 |
|
| To Bank A/c |
|
| 100000 |
| (Being amount paid) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 125000 |
|
| To Royalty A/c |
|
| 125000 |
| (Being amount charged to relevant a/c) |
|
|
|
Journal Entries Year 4
Date | Particular |
| Amount (Dr.) | Amount (Cr.) |
31 Dec | Royalty A/c | Dr. | 135000 |
|
| To Short-workings A/c |
|
| 35000 |
| To Lessor A/c |
|
| 100000 |
| (Being payment due) |
|
|
|
31 Dec | Lessor A/c | Dr. | 100000 |
|
| To Bank A/c |
|
| 100000 |
| (Being amount paid) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 135000 |
|
| To Royalty A/c |
|
| 135000 |
| (Being amount charged to relevant a/c) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 40000 |
|
| To short-working A/c |
|
| 40000 |
| (Being amount charged to relevant a/c) |
|
|
|
Journal Entries Year 5
Date | Particular |
| Amount (Dr.) | Amount (Cr.) |
31 Dec | Royalty A/c | Dr. | 250000 |
|
| To Lessor A/c |
|
| 250000 |
| (Being payment due) |
|
|
|
31 Dec | Lessor A/c | Dr. | 250000 |
|
| To Bank A/c |
|
| 250000 |
| (Being amount paid) |
|
|
|
31 Dec | Profit and Loss A/c | Dr. | 250000 |
|
| To Royalty A/c |
|
| 250000 |
| (Being amount charged to relevant a/c) |
|
|
|
Ledgers account in Lessee Books
Lessor A/c
Date | Particulars | Amount |
| Date | Particulars | Amount |
Year1 | To Bank a/c | 100000 |
| Year1 | By Royalty a/c | 45000 |
|
|
|
|
| By Short-workings | 65000 |
|
| 100000 |
|
|
| 100000 |
Year2 | To Bank a/c | 100000 |
| Year2 | By Royalty a/c | 65000 |
|
|
|
|
| By Short-workings | 45000 |
|
| 100000 |
|
|
| 100000 |
Year3 | To Bank a/c | 100000 |
| Year3 | By Royalty a/c | 100000 |
|
| 100000 |
|
|
| 100000 |
Year4 | To Bank a/c | 100000 |
| Year4 | By Royalty a/c | 100000 |
|
| 100000 |
|
|
| 100000 |
Year5 | To Bank a/c | 250000 |
| Year5 | By Royalty a/c | 250000 |
|
| 250000 |
|
|
| 250000 |
Short-workings A/c
Date | Particulars | Amount |
| Date | Particulars | Amount |
Year1 | To Lessor a/c | 65000 |
| Year1 | By balance c/d | 65000 |
|
| 65000 |
|
|
| 65000 |
Year2 | To balance b/d | 65000 |
| Year2 |
|
|
| To Lessor a/c | 45000 |
|
| By balance c/d | 100000 |
|
| 100000 |
|
|
| 100000 |
Year3 | To balance b/d | 100000 |
| Year3 | By Royalty a/c | 25000 |
|
|
|
|
| By balance c/d | 75000 |
|
| 100000 |
|
|
| 100000 |
Year4 | To balance b/d | 75000 |
| Year4 | By Royalty a/c | 35000 |
|
|
|
|
| By P&L a/c | 40000 |
|
| 75000 |
|
|
| 75000 |
Royalty A/c
Date | Particulars | Amount |
| Date | Particulars | Amount |
Year1 | To Lessor | 45000 |
| Year1 | By P&L | 45000 |
|
| 45000 |
|
|
| 45000 |
Year2 | To Lessor | 65000 |
| Year2 | By P&L | 65000 |
|
| 65000 |
|
|
| 65000 |
Year3 | To Lessor | 100000 |
| Year3 | By P&L | 125000 |
| To Short-workings | 25000 |
|
|
|
|
|
| 125000 |
|
|
| 125000 |
Year4 | To Lessor | 100000 |
| Year4 | By P&L | 135000 |
| To Short-workings | 35000 |
|
|
|
|
|
| 135000 |
|
|
| 135000 |
Year5 | To Lessor | 250000 |
| Year5 | By P&L | 250000 |
Q13) X Ltd. had the right to publish and sell books for five years from Bharat. The minimum rent is £ 20000. Royalty is £ 5 per book. Bharat is X Ltd in the first four years. Recognized the right to regain short-term work to. The sales for 5 years are as follows.
Year | Books sold |
1 | 2500 |
2 | 3000 |
3 | 4500 |
4 | 5000 |
5 | 6000 |
Calculate royalties’ payments and short-term work. In addition, we will give you the journals required for Bharat's books for 5 years. You also need to set up an X Ltd account. The book is closed on March 31st every year.
A13)
In Bharat's book
Date | Particulars |
| Amount (Dr.) | Amount (Cr.) |
1st Year |
|
|
|
|
31st Mar | X Ltd.’s A/c | Dr. | 20000 |
|
| To Royalty receivable A/c |
|
| 12500 |
| To Short-workings Allowable A/c |
|
| 7500 |
| (Being royalty due from X Ltd. and short-workings allowed) |
|
|
|
31st Mar | Bank A/c | Dr. | 20000 |
|
| To X Ltd.’s A/c |
|
| 20000 |
| (Being money received from X Ltd.) |
|
|
|
31st Mar | Royalty receivable A/c | Dr. | 12500 |
|
| To Profit &Loss A/c |
|
| 12500 |
| (Being royalty received transferred to the Profit &Loss A/c) |
|
|
|
2nd Year |
|
|
|
|
31st Mar | X Ltd.’s A/c | Dr. | 20000 |
|
| To Royalty receivable A/c |
|
| 15000 |
| To Short-workings Allowable A/c |
|
| 5000 |
| (Being royalty due from X Ltd. and short-workings allowed) |
|
|
|
31st Mar | Bank A/c | Dr. | 20000 |
|
| To X Ltd.’s A/c |
|
| 20000 |
| (Being money received from X Ltd.) |
|
|
|
31st Mar | Royalty receivable A/c | Dr. | 15000 |
|
| To Profit &Loss A/c |
|
| 15000 |
| (Being royalty received transferred to the Profit &Loss A/c) |
|
|
|
3rd Year |
|
|
|
|
31st Mar | X Ltd.’s A/c | Dr. | 22500 |
|
| To Royalty receivable A/c |
|
| 22500 |
| (Being royalty due from X Ltd.) |
|
|
|
31st Mar | Short-workings Allowable A/c | Dr. | 2500 |
|
| To X Ltd.’s A/c |
|
| 2500 |
| (Being amount of short-workings recouped) |
|
|
|
31st Mar | Bank A/c | Dr. | 20000 |
|
| To X Ltd.’s A/c |
|
| 20000 |
| (Being money received from X Ltd.) |
|
|
|
31st Mar | Royalty receivable A/c | Dr. | 22500 |
|
| To Profit &Loss A/c |
|
| 22500 |
| (Being royalty received transferred to the Profit &Loss A/c) |
|
|
|
4th Year |
|
|
|
|
31st Mar | X Ltd’s A/c | Dr. | 25000 |
|
| To Royalty receivable A/c |
|
| 25000 |
| (Being royalty due from X Ltd.) |
|
|
|
31st Mar | Short-workings Allowable A/c | Dr. | 5000 |
|
| To X Ltd.’s A/c |
|
| 5000 |
| (Being amount of short-workings recouped) |
|
|
|
31st Mar | Bank A/c | Dr. | 20000 |
|
| To X Ltd.’s A/c |
|
| 20000 |
| (Being money received from X Ltd.) |
|
|
|
31st Mar | Royalty receivable A/c | Dr. | 25000 |
|
| To Profit &Loss A/c |
|
| 25000 |
| (Being royalty received transferred to the Profit &Loss A/c) |
|
|
|
5th Year |
|
|
|
|
31st Mar | X Ltd.’s A/c | Dr. | 30000 |
|
| To Royalty receivable A/c |
|
| 30000 |
| (Being royalty due from X Ltd.) |
|
|
|
31st Mar | Bank A/c | Dr. | 30000 |
|
| To X Ltd.’s A/c |
|
| 30000 |
| (Being money received from X Ltd.) |
|
|
|
31st Mar | Royalty receivable A/c | Dr. | 30000 |
|
| To Profit &Loss A/c |
|
| 30000 |
| (Being royalty received transferred to the Profit &Loss A/c) |
|
|
|
31st Mar | Short-workings Allowable A/c | Dr. | 5000 |
|
| To Profit and Loss A/c |
|
| 5000 |
| (Being the amount of short-workings lapsed) |
|
|
|
X Ltd.’s A/c
Date | Particulars | Amount |
| Date | Particulars | Amount |
1st Year |
|
|
| 1st Year |
|
|
31 Mar | To Royalty receivable A/c | 12500 |
| 31 Mar | By Bank A/c | 20000 |
31 Mar | To Short-workings Allowable A/c | 7500 |
|
|
|
|
|
|
|
|
|
|
|
|
| 20000 |
|
|
| 20000 |
2nd Year |
|
|
| 2nd Year |
|
|
31 Mar | To Royalty receivable A/c | 15000 |
| 31 Mar | By Bank A/c | 20000 |
31 Mar | To Short-workings Allowable A/c | 5000 |
|
|
|
|
|
|
|
|
|
|
|
|
| 20000 |
|
|
| 20000 |
3rd Year |
|
|
| 3rd Year |
|
|
31 Mar | To Royalty receivable A/c | 22500 |
| 31 Mar | By Short-workings Allowable A/c | 2500 |
|
|
|
| 31 Mar | By Bank A/c | 20000 |
|
|
|
|
|
|
|
|
| 22500 |
|
|
| 22500 |
4th Year |
|
|
| 4th Year |
|
|
31 Mar | To Royalty receivable A/c | 25000 |
| 31 Mar | By Short-workings Allowable A/c | 5000 |
|
|
|
| 31 Mar | By Bank A/c | 20000 |
|
|
|
|
|
|
|
|
| 25000 |
|
|
| 25000 |
5th Year |
|
|
| 5th Year |
|
|
31 Mar | To Royalty receivable A/c | 30000 |
| 31 Mar | By Bank A/c | 30000 |
|
|
|
|
|
|
|
|
| 30000 |
|
|
| 30000 |
Working Notes:
Calculation of Royalty, Minimum Rent and Short-workings
Year | Books sold | Rate per book | Royalty | Minimum Rent | Short-workings |
1 | 2500 | 5 | 12500 | 20000 | 7500 |
2 | 3000 | 5 | 15000 | 20000 | 5000 |
3 | 4500 | 5 | 22500 | 20000 |
|
4 | 5000 | 5 | 25000 | 20000 |
|
5 | 6000 | 5 | 30000 | 20000 |
|
Computation of Recoupment, Short-workings carried forward and transferred to profit and loss A/c
Year | Recoupment | Short-workings carried forward | Transferred to P&L A/c | Payment to Bharat |
1 |
| 7500 |
| 20000 |
2 |
| 12500 |
| 20000 |
3 | 2500 | 10000 |
| 20000 |
4 | 5000 | 5000 | 5000 | 20000 |
5 |
|
|
| 30000 |
Q14) Bee Ltd. has acquired the right to publish and sell books from Smith for five years. The minimum rent was fixed at £ 20000. Royalty was fixed at £ 4 per book. Bee Ltd. reserves the right to regain what it worked for in the first four years. The sales for 5 years are displayed. Calculate royalties’ payments and short-term work.
Year | Books sold |
1 | 3000 |
2 | 4000 |
3 | 6000 |
4 | 6500 |
5 | 8000 |
A14)
Calculation of Royalty, Minimum Rent and Short-workings
Year | Books sold | Rate per book | Royalty | Minimum Rent | Short-workings |
1 | 3000 | 4 | 12000 | 20000 | 8000 |
2 | 4000 | 4 | 16000 | 20000 | 4000 |
3 | 6000 | 4 | 24000 | 20000 |
|
4 | 6500 | 4 | 26000 | 20000 |
|
5 | 8000 | 4 | 32000 | 20000 |
|
Computation of Recoupment, Short-workings carried forward and transferred to profit and loss A/c
Year | Recoupment | Short-workings carried forward | Transferred to P&L A/c | Payment to Smith |
1 |
| 8000 |
| 20000 |
2 |
| 12000 |
| 20000 |
3 | 4000 | 8000 |
| 20000 |
4 | 6000 | 2000 | 2000 | 20000 |
5 |
|
|
| 32000 |
Q15) From the information below, open and prepare the required account for the books of M / s Black Diamond Limited.
A15)
Analytical Table
Year | Output (Tons) | Royalties @ Rs. 1 Per ton | Short workings | Surplus | Recoupment | Un Recoupable Short workings | Payable to Landlord | |
2010 2011 2012 2013 | 40,000 65,000 105,000 90,000 | 40,000 65,000 105,000 90,000 | 35,000 10,000 -- | 30,000 15,000 | -- -- 30,000 | 15,000 | 75,000 75,000 75,000 90,000 | |
| 300,000 | 300,000 | 45,000 | 45,000 | 30,000 | 15,000 | 315,000 | |
In the books of M/s Black Diamonds Ltd
Royalties Account
Date | Particulars | Amount | Date | Particulars | Amount |
31-12-2010 31-12-2011 31-12-2012 31-12-2013 | To Landlord A/c To Landlord A/c To Landlord A/c To Landlord A/c | 40,000 ======= 65,000 ======= 105,000 ======= 90,000 ======= | 31-12-2010 31-12-2011 31-12-2012 31-12-2013 | By Production A/c By Production A/c By Production A/c By Production A/c | 40,000 ======= 65,000 ======= 105,000 ======= 90,000 ======= |
Landlord Account
Date | Particulars | Amount | Date | Particulars | Amount |
31-12-2010 31-12-2011 | To Bank A/c To Bank A/c | 75,000 ---------- 75,000 ---------- 75,000 ---------- 75,000 ---------- | 31-12-2010 31-12-2011 | By Royalties A/c By Short workings A/c By Royalties A/c By Short workings A/c | 40,000 35,000 ---------- 75,000 ---------- 65,000 10,000 ---------- 75,000 ---------- |
31-12-2012 31-12-2012 31-12-2013 | To Short workings A/c To Bank A/c To Bank A/c | 30,000 75,000 ---------- 105,000 ---------- 90,000 ---------- 90,000 ---------- | 31-12-2012 31-12-2013 | By Royalties A/c By Royalties A/c | 105,000 ---------- 105,000 ---------- 90,000 ---------- 90,000 ---------- |
Date | Particulars | Amount | Date | Particulars | Amount |
31-12-2010 01-01-2011 01-01-2012 | To Landlord A/c To Balance b/d To Landlord A/c To Balance b/d | 35,000 ---------- 35,000 ---------- 35,000 10,000 ---------- 45,000 ---------- 45,000 ---------- 45,000 ---------- | 31-12-2010 31-12-2011 31-12-2012 31-12-2010 | By Balance C/d By Balance C/d By Landlord A/c By Profit & Loss A/c | 35,000 ---------- 35,000 ---------- 45,000 ---------- 45,000 ---------- 30,000 15,000 ---------- 45,000 -------- |
Q16) The M / s Hyderabad publication printed a book on Java at the lowest rent for Rs. 1,000,000 /-Annual royalties are paid in @ rupees. 20 books sold per book. In the first year of publication, Hyderabad publications sold 75,000 books, and in the second year, the number of books sold decreased to 45,000. The amount of royalties will be paid as follows-
Minimum Rent | Royalty Payable | |
Ist Year 75,000 Books X Rs. 20 per book = Rs. 1,5,00,000 | 1,0,00,000 | Rs. 1,5,00,000 |
IInd Year 45,000 Books X Rs. 20 per book = Rs. 9,00,000 | 1,0,00,000 | Rs. 1,0,00,000 |
A16)
Short working
The difference between the minimum rent and the actual royalty is known as underwork, where royalties are paid based on the minimum rent due to a shortage of production or sales. For example, if the calculated royalty is Rs. According to the sale of the book based on the above example is 900,000 /-, but the royalty paid is Rs. The minimum rent is 1000,000 and short-term work is rupees. 100,000 (Rs. 1,000,000–Rs. 9,00,000).