LECTURE ONE

ROYALTIES ACCOUNT

What are royalties?

Royalties are usage-based payments made by one party (the licensee or tenent) to another (the licensor
or land lord) for ongoing use of an asset. It can also be referred to as the consideration paid by the party
using or exercising the right to the party owning it. Thus, it represents sums of money accrued on the
output obtained from the use of an asset or property belonging to another. Royalties are typically
agreed upon as a percentage of gross or net revenues derived from the use of an asset or a fixed price
per unit sold of an item of such.

The owner of a certain legal right may, as business arrangements allow another party to exercise that
right. Usually, a license agreement is issued by the landlord to the tenant and it defines the terms under
which a resource or property such as petroleum, minerals, patents, trademarks, and copyrights should
be used.

In accounting context, the rights commonly encountered include:

i. The right to copy the work of an author or artiste (copyright)

ii. The right to use a device or process patented by its originator or inventor (patent
rights).
iii. The right to extract minerals from ground belonging to someone else (mineral rights)
With respect to charging royalties, royalties’ payable is either based on

(1) Production or

(2) Sale

When it is payable on production, the royalty is to be regarded as cost of production and should be
debited to Production or manufacturing Account. When it is based on sales, it should be regarded as a
selling expense and debited to the Profit & loss account.

In other words, if payable, the royalties represent a charge (debit) against revenue account, or in the
case of manufacturing concerns, a debit to the manufacturing account. If receivable, it represents
income and as such will be credited to revenue accounts

BOOK-KEEPING ENTRIES

ENTRIES IN THE BOOKS OF THE LEASEE (TENANT)

The following entries are made in the books of the Tenant/Leasee:

a) Debit manufacturing or profit & loss account with the royalties payable on quantity
extracted; Credit royalties’ payable account.
b) Debit royalties payable account with the amount payable on quantity extracted; credit
landlord’s personal account.
c) Debit landlord’s personal account with amount paid; credit cash account.
Example 1

Opoku Miners secured a lease of mining rights from Sahwi-Wiaso Traditional Council to mine crude oil
for a royalty of GH¢10.00 per barrel of crude oil.

The following were the quantities worked during the first four years.

Year Barrels

1 300

2 320

3 400

4 490

You are required to prepare in the books of the leasee:

a. Royalties Payable Account

b. The landlord Account.

Solution

a. Royalties Payable Account

Year GH¢ Year GH¢

1 Landlord 3,000 1 Manufacturing 3,000

2 Landlord 3,200 2 Manufacturing 3,200

3 Landlord 4,000 3 Manufacturing 4,000

4 Landlord 4,900 4 Manufacturing 4,900

b. Landlord Account
Year GH¢ Year GH¢

1 cash 3,000 1 Royalties Payable 3,000

2 cash 3,200 2 Royalties Payable 3,200

3 cash 4,000 3 Royalties Payable 4,000

4 cash 4,900 4 Royalties Payable 4,900

Workings:

Royalties payable Year 1 = ¢10 x 300 barrels

Year 2 = ¢10 x 320 barrels

 Year 3 = ¢ 10 x 400 barrels

Year 4 = ¢ 10 x 490 barrels

MINIMUM RENT/PAYMENT (MINIMUM OUTPUT)

This is the guaranteed minimum amount that the lessee must pay the lessor every year for the right
use of asset. In some cases, a clause in the lease agreement may fix a minimum or dead rent which
must be paid irrespective of what the output may be. The minimum rent merges so that the actual
amount paid to the landlord will not be less than a certain agreed minimum amount. Where the
output royalty is less than the minimum rent the tenant/leasee has short-worked. The amount that
falls short of the minimum rent is described as “shortworkings”. In some cases, where minimum rent
exists, another clause may also provide for recoupment of shortworkings in subsequent years where
the royalty exceeds the minimum rent.

The entries with respect to shortworkings

a) Debit shortworking account, credit landlord account with the shortworkings for the
period
b) Where shortworkings are recoupable, the shortworkings account is credited and
profit and loss account debited
c) If the shortworkings are recouped the landlord’s account is debited and
shortworkings account credited.

Example 2

Gee Bee Ltd. was granted a lease from a period of 5 years for a royalty of GH¢5.00 per ton margin into
a minimum rent of GH¢1,000 per annum. Gee Bee ltd. was granted the right to recoup Short working
within the first three years only.

The following were the quantities extracted

Year Tones

2006 120

2007 180

2008 260

2009 300

Prepare:

a. Royalty Account
b. Landlord Account
Solution

a. Royalty Account
GH¢ GH¢

2006 Landlord 600 2006 Manufacturing A/C 600

2007 Landlord 900 2007 Manufacturing A/C 900

2008 Landlord 1,300 2008 Manufacturing A/C 1,300

2009 Landlord 1,500 2009 Manufacturing A/C 1,500

b. Landlord Account
GH¢ GH¢

2006 cash 1,000 2006 Royalty 600

Short Workings 400

1,000 1,000

2007 cash 1,000 2007 Royalty 900

Short workings 100

1,000 1,000

2008 S. workings 300 2008 Royalty 1300

Cash 1,000

1,300 1,300

2009 cash 1,500 2009 Royalty 1,500

c. Short workings Recoverable Account

GH¢ GH¢

2006 Landlord 400 2006 Balance c/d 400

2007 balance b/d 400 2007 Balance c/d 500

Landlord 100

500 500

2008 Balance b/d 500 2008 Landlord 300

Profit & Loss a/c 200

500 500
Notes:

i. In 2006, the output of 120 tones gives a royalty of ¢600 i.e. GH¢5 x 120 tone. Because
the minimum rent is GH¢1000, it means the output is short of GH¢400 to make up
the minimum rent. In 2007 the Short workings came to GH¢100
ii. In2008the output gave a royalty of GH¢1300. The tenant has the power to recover
short workings within the first three years and at the beginning of 2008 he had the
power three years and at the beginning of 2008 he had to recover GH¢400 (2006, 300
and 2007, GH¢100). Only GH¢300 and sine 2008 is the final year in which he can
recover short working, the unrecovered balance goes to the profit and loss account.

Example 3

Western Mining Co. acquired a lease of mining rights to mine diamond in Akwatia for a royalty of
GH¢10.00 per ton merging into a dead rent of GH¢2,500. Shortworkings in any year are recoupable
within the next two years right after the year in which they occurred but not afterwards.

The outputs for the first five years were as follows:

Year Tonnes

1 200

2 240

3 290

4 300

5 310

Show the accounts recording the above transactions.

Solution: In the books of Western Mining Co.

a. Royalty Payables Account

GH¢ GH¢

1 Landlord 2,000 1 Manufacturing 2,000

2 Landlord 2,400 2 Manufacturing 2,400

3 Landlord 2,900 3 Manufacturing 2,900

4 Landlord 3,000 4 Manufacturing 3,000

5 Landlord 3,100 5 Manufacturing 3,100

 b. Landlord Account
Year GH¢ Year GH¢

1 Cash 2,500 1 Royalty 2,000

Short workings 500

2,500 2,500

2 Cash 2,500 2 Royalty 2,400

Short workings 100

2,500 2,500

3 S. Workings 400 3 Royalty 2,900

Cash 2,500

2,900 2,900

4 S. Workings 100 4 Royalty 3,000

Cash 2,900

3,000 3,000

5 Cash 3,100 5 Royalty 3,100

c. Short workings Account

Year GH¢ Year GH¢

1 Landlord 500 2 Balance c/d 600

2 Landlord 100

600 600

3 Balance b/d 600 3 Landlord 400

Profit & Loss a/d 100

Balance c/d 100

600 600

Notes: Shortworkings are recoupable in the first two years, immediately following that in which they
occurred but not after that. This means that the shortworking in year 1. ¢500 could be recouped in
year 2 and 3 but not year 4. This will also mean that the unrecouped shortworkings of year 1 would be
transferred to Profit and Loss Account at the end of year 3. Meanwhile the shortworkings in year 2
are recoupable in year 3 or year 4 but not in year 5.
EXAMPLE 4

Accra City Council granted a lease to stone crashers to work in a quarry for a royalty of GH¢100 per
ton merging into a dead rent of GH¢100, 000 per annum. The deal was signed on January 1st 2002.
Royalties are payable on 1st January each year. Shortworkings are recoverable.

The output was as follows:

Year Ended 31st December Tones

2002 800

2003 1,100

2004 1,500

Stone Crashers balance their account annually on 31st December,

Prepare in stone Crashers Books:

a. Royalty Payable Account

b. Accra City Council Account
c. Shortworkings

Solution

STONE CRASHERS

a. Royalty Payable
GH¢
GH¢

31/12/02 Accra City Council 80,000 31/12/02 Manufacturing 80,000

31/12/03 Accra City Council 110,000 31/12 03 Manufacturing 110,000

31/12/04 Accra City Council 150,000 31/12/04 Manufacturing 150,000

 b. Accra City Council
GH¢ GH¢

31/12/02 Balance c/d 100,000 31/12/02 Royalty Payable 80,000

Shortworkings 20,000

100,000 100,000

1/1/03 Bank 100,000 1/1/03 Balance b/d 100,000

31/12/03 Shortworkings 10,000 31/12/04 Royalty P. 110,000

Balance c/d 100,000

210,000 210,000

1/1//04 Bank 100,000 1/1/04 Balance b/d 100,000

31/12/04 Shortworkings 10,000 Royalty Payable 150,000

Balance c/d 140,000

250,000 250,000

1/1/05 Bank 140,000 1/1/05 Balance b/d 140,000

c. Shortworkings A/C
GH¢ GH¢

31/12/02 ACC 20,000 31/12/03 ACC

10,000

Balance C/D
10,000

20,000
20,000

1/1/04 Balance b/d 10,000 31/12/04 ACC 10,000

Note:

The Landlord is not paid at the end of the year but on the first day of the following year thus the
tenant (Stone Crashers) owes the Landlord at the time of balancing.
ENTRIES IN THE BOOKS OF THE LEASOR/LANDLORD:

a) Debit Leasee’s Account, credit royalties receivable account with the royalty payable
by the lease on the output for the year
b) Debit royalty receivable, credit profit and loss account in transferring it to the profit
and loss account
c) Debit cash account, credit leasee’s account on receipt of cash for royalties
d) Debit tenant, credit shortworkings account with the shortworkings of the lease.

EXAMPLES 5

On 30th April 1992 Strong Enterprise was granted a lease of mining rights to work a mine for a royalty
of GH¢2.00 per ton merging into a minimum rent of GH¢4,000 per annum. Shortworking are
recoupable.

The following were the output for the first three years.

Year ended 31st March Tonnes

1993 1,800

1994 2,100

1995 4,000

Record the above transactions in the books of the Landlord.

SOLUTION
a. Royalties Receivable Account
YEAR GH¢ YEAR GH¢

31/3/93profit & Loss a/c 3,600 31/3/93Tenant 3,600

31/3/94Profit&Loss a/c 4,200 31/3/94Tenant 4,200

31/3/93Profit & Loss a/c 8,000 31/3/95Tenant 8,000

b. Strong Enterprise Account

YEAR GH¢ YEAR GH¢

31/3/93Royalties Receivable 3,600 31/3/93Cash 4,000

S. Working Allowable 400

4,000 4,000

31/3/94Royalties Receivable 4,200 31/3/94Shortworking 200

Allowable 4,000
 4,200 4,200

31/3/95Royalties R. 8,000 31/3/95Shortworkings

Allowable 200

Cash 7,800

8,000 8,000

c. Shortworkings Allowable Account

GH¢ GH¢

31/3/94Strong Ent. 200 31/3/93Strong Ent. 400

Balance c/d 200

400 400

31/3/95Strong Ent. 200 1/4/94 Balance b/d 200

It must be noted that the balance on the shortworkings allowable account appears in the balance
sheet of the Landlord as a current liability. On the other hand, Shortworkings Recoverable in the
books of the tenant is a Current Asset.

TREATMENT OF SUB-LEASE

Where the tenant sub-lets part of the lease, this is described as a Sub-lease.

Under Sub-lease, the main tenant becomes responsible for the payment of all royalties to the
Landlord.

The entries in the books of the main tenant are as follows;

a. Debit Manufacturing account; Credit Royalty Payable account with the Royalty rent on
output of main tenant.
b. Debt Royalty Receivable; Credit Royalty payable with the royalty rent on the output of
the sub-tenant.
c. Debit Royalty Payable; Credit Landlord with the royalty rent of the total output of the
main tenant and sub-tenant.
d. Debi sub-tenant; Credit Shortworkings allowable with any Shortworkings of the sub-
tenant.
e. Debit Cash; Credit Sub-tenants with amount received for royalties.
f. Debit Royalty Receivable account with any profit on sub-lease, Credit Profit and loss
account.
g. Debit Shortworkings Recoverable account; Credit Landlord with any Shortworkings on
the total output of sub-tenant and main tenant.
h. Debit landlord with amount paid on royalties; Credit Cash.
 i. When Shortworkings are recouped by the Sub-tenant, debit Shortworkings Allowable;
Credit Sub-tenant.
j. Shortworkings Recoverable account is credited and the Landlord account debited
when shortworkings are recovered.

Example 6

Billy Co. Ltd. Was granted a lease to mine iron ore for a royalty of GH¢100 per ounce merging into a
minimum rent of GH¢120,000 per annum. Shortworkings are recoupable within the first three years
only. Billy Co. Ltd. Sub-let part of the right to Jimmy Co. Ltd. for a royalty of GH¢120 per ounce with a
dead rent of GH¢40,000 per anum. Shortworkings are recoupable. The output for the first three years
was as follow:

Year ended 31st Dec. Billy (Ounces) (Jimmy Ounce)

2000 700 300

2001 800 350

2002 1,000 480

2003 1,100 500

Payments of royalties are made on 31st December each year.

You are required to prepare in the Books of Billy Co. Ltd.

a. Royalty Payable Account

b. Royalty Receivable Account
c. Landlord Account
d. Jimmy Account
e. Shortworkings Recoverable Account
f. Shortworkings Allowable Account.

In the books of Billy Co.:

a. Royalty Payable Account.

31/12 GH¢ 31/12 GH¢

2000 Landlord 100,000 2000 Manufacturing 70,000

Royalty Receivable 30,000

100,000 100,000

2001 landlord 115,00 0 2001 Manufacturing 80,000

Royalty Receivable 35,000

115,00 115,000
2002 Landlord 148,000 2002 Manufacturing 100,000

Royalty Receivable 48,000

148,000 148,000

2003 Landlord 160,000 2003 Manufacturing 110,000

Royalty Receivable 50,000

160,000 160,000

b. Royalty receivable Account

31/12 GH¢ 31/12 GH¢

2000 Royalty P. 30,000 2000 Jimmy 36,000

P&L Account 6,000

36,000 36,000

2001 Royalty P. 35,000 2001 Jimmy 42,000

P&L Account 7,000

42,000 42,000

2002 Royalty P 48,000 2002 Jimmy 57,600

P&L Account 9,000

57,000 57,000

2003 Royalty P. 50,000 2003 Jimmy 60,000

P&L Account. 10,000

60,000 60,000
 c. Landlord Account
31/12 GH¢ 31/12 GH¢

2000 cash 120,000 2000 Royalty Payable 100,000

Shortworkings Rec. 20,000

120,000 120,000

2001 cash 120,000 2001 Royalty Payable 115,000

Shortworkings 5,000

120,000 120,000

2002 Short. Rec. 25,000 2002 Royalty Payable 148,000

Cash 123,000

148,000 148,000

2003 cash 160,000 2003 Royalty Payable 160,000

d. Jimmy Account
31/12 GH¢ 31/12 GH¢

2000 Royalty Rec. 36,000 2000 cash 40,000

S. working 4,000

40,000 40,000

2001 Royalty Rec. 42,000 2001 S. Allowable 2,000

Cash 40,000

42,000 42,000

2002 Royalty Rec. 57,600 2002 S. Allowable 2,000

Cash 55,000

57,000 57,000

2003 Royalty Rec. 60,000 2003 cash 60,000

 e. Shortworkings Recoverable Account
GH¢ GH¢

2000 Landlord 20,000 2001 Balance c/d 25,000

2001 Landlord 5,000

25,000 25,000

1/1/02Balance b/d 25,000 2002 Landlord 25,000

f. Shortworkings Allowable Account

GH¢ GH¢

2001 Jimmy 2,000 2000 Jimmy 4,000

Balance 2,000

4,000 4,000

2002 Jimmy 2,000 1/1/02 Bal. b/d 2,000

Example 7

The Chief of Aboso village granted to Dodoo and Co. Ltd a lease of mining rights, providing for
royalties at the rate of GH¢60 per ounce of gold raised, with a minimum output of 1800 ounces per
annum. The lease was given powers to grant sub-leases.

The company granted to Nsuata Gold Co. Ltd. A sub-lease, providing for royalties at the rate of GH¢70
per ounce of gold raised subject to a minimum rent of GH¢63,000 per annum.

Both the lease and the sub-lease provided that Shortworkings of any one year could be recovered
from the royalties of the following two years.

Production during the first three years was as follows;

Year to 31st Dec. Dodoo & Co. Ltd Nsuta Gold Co. Ltd.

1997 610 ounces 440 ounces

1999 930 620

2000 1,475 1,000

Sums receivable by Dodoo & Co. Ltd. in respect of each year were duly received in the first month of
the following year sums payable to the Chief were similarly paid at the same time.

Dodoo & Co. Ltd. balances its books at 31st December each year.

a. Landlord
b. Shortworkings pea coverable
c. Nsuta Gold Co. Ltd.
d. Shortworkings Allowable
e. Royalties Receivable
f. Royalties Payable.

SOLUTION

a. Landlord Account.
GH¢ GH¢

31/12/98 Balance c/d 108,000 31/12/98 Royalty Payable 63,000

S. Rec. 45,000

108,000 108,000

31/12/99 cash 108,000 1/1/99 balance b/d 108,000

31/12/99 balance c/d 108,000 31/12/99 Royalty Pay. 93,000

S. Rec 15,000

216,000 216,000

31/1/2000 cash 108,000 1/1/2000 Balance b/d 108,000

Shortworkings 31/12/2000 Royalty Payable 148,000

Recoverable 40,500
 Balance c/d 108,000

256,500 256,500

31/1//2001 cash 108,000 1/1/2001 Balance b/d 108,000

b. Shortworkings Recoverable
GH¢ GH¢

31/12/98 Landlord 45,000 31/12/99 balance c/d 60,000

31/12/99 Landlord 15,000

60,000 60,000

1/1/2000 Balance b/d 60,000 31/12/2000 landlord 40500

P&L a/c 4500

Balance c/d 15000

60,000 60,000

1/1/2001 Balance b/d 15000

c. Nsuta Gold Ltd. Account

GH¢ GH¢

31/12/98 Royalty Rec. 30,800 31/12/98 Balance c/d 63,000

Short. W all 32,200

63,000 63,000

1/1/99 Balance b/d 63,000 31/1/99cash 63,000

31/12/99 Royal rec. 43,400 31/12/2000 balance c/d 63,000

Short W.

Allowable 19,600

126,000 126,000

1/1/2000 balance b/d 63,000 31/1/2000 cash 63,000

31/12/2000 royalty Rec. 70,000 31/12/2000 Shortworkings

Allowable 7,000
 Balance c/d 63,000

133,000 133,000

1/1/2001 balance 63,000 31/1/2001 cash 63,000

d. Shortworkings Allowable Account

GH¢ GH¢

31/12/98 Balance 51,800 31/12/98 Nsuta Gold Ltd 32,200

31/12/99 Nsuta Gold Ltd 19,600

51,800 51,800

31/12/2000 Nsuta Gold L. 7,000 1/1/2000 Balance b/d 51,800

P&L Account 25,200

Balance c/d 19,600

51,800 51,800

e. Royalties Receivable Account

GH¢ GH¢

31/12/98 Royalty P. 26,400 31/12/98 Nsuta Gold Ltd. 30,800

P&L Account 4,400

30,800 30,800

31/12/99 royalty P. 37,200 31/12/99 Nsuta Gold ltd 43,400

P&L Account 6,200

43,400 43,400

31/12/2000 Royalty P 60,000 31/12/2000 Nsuta Gold Ltd 70,000

P&L account 10,000

70,000 70,000
 f. Royalty Payable Account
GH¢ GH¢

31/12/98 Landlord 63,000 31/12/98 Manufacturing 36,600

Royalty Rec. able 24,400

63,000 63,000

31/12/99 landlord 93,000 31/12/99 Manufacturing 55,800

Royalty Rec. able 37,200

93,000 93,000

31/12/2000 landlord 148,500 31/12/2000 Manufacturing 88,500

Royalty Rec. able 60,000

148,500 148,500

MINIMUM RENT ACCOUNT

In some cases, a minimum rent account is kept. In this case, where the royalty accrued is less than the
minimum rent, the royalty payable account is debited and minimum rent account credited with the
royalty rent. Shortworkings will be debited to shortworkings account and minimum rent account
credited. The minimum rent is then transferred to the landlord’s account.

EXAMPLE

X Ltd. obtains a lease of land from chief Y, the terms being royalty of GH¢4.00 per ton raised with a
dead rent of GH¢500 per annum with a right to recoup shortworkings. In 1980, 80 tonnes were
raised; in 1981, 120 tonnes and in 1982, 200 tonnes.

You are required to show the accounts in the books of the lease.

ROYALTIES ACCOUNT

GH ¢ GH¢
1980 Minimum 320 1980 Manufacturing 320
rent
 1981 Minimum 480 1981 Manufacturing 480
rent
1982 Landlord 800 1982 Manufacturing 800

NOTE

Royalty rent for 1980 and for 1981 have been sent to the minimum rent account because the
amounts are less than the minimum rent (GH¢500).

MINIMUM RENT ACCOUNT

GH¢ GH¢
1980 Landlord 500 1980 Royalty 320
Shortworkings 180
500 500
1981 Landlord 500 1981 Royalty 480
Shortworkings 20
500 500

LANDLORD’S PERSONAL ACCOUNT

Year GH¢ GH¢
1980 Bank 500 1980 Minimum 500
rent
500 500
1981 Bank 500 1981 Minimum 500
rent
500 500
1982 Shortworkings 200 1982 Royalty 800
Bank 600
800 800

SHORTWORKINGS ACCOUNT
GH¢ GH¢
1980 Minimum 180 1982 Landlord 200
rent
1981 Minimum 20
rent
200 200