Ram Co Ltd leased a property from Arun at a royalty of Rs. 1.50 per tonne with a minimum rent of Rs. 2,000 per annum. Each year's excess of minimum rent over royalties is recoverable out of the royalties of the next five years. In the event of a strike and the minimum rent not being reached, the lease provided that minimum rent would stand reduced proportionate to the time actually worked.
The results of the working were as follows:
Year ended 31st December | Actual Royalties Rs.
1989 | Nil
1990 | 650
1991 | 1,850
1992 | 2,250
1993 | 3,500
1994 (Strike for 4 months) | 1,200
1995 | 3,000
Prepare the Royalty Account, Shortworkings Account, and Arun's Account in the books of Ram Co. Ltd.
Answer (1)
To solve this problem, we need to prepare the Royalty Account, Shortworkings Account, and Arun's Account in the books of Ram Co. Ltd. Let's break down each part step-by-step.
1. Understanding the Problem:
Ram Co Ltd leases a property with a royalty of Rs. 1.50 per tonne, and a minimum rent of Rs. 2,000 per annum.
Any shortfall of royalty compared to the minimum rent is termed as 'shortworkings,' which can be recovered out of royalties of the next five years.
In the event of a strike, the minimum rent is reduced proportionally to the period worked.
2. Calculating Shortworkings for Each Year:
1989: Actual Royalty = Rs. 0; Minimum Rent = Rs. 2,000
Shortworkings = Rs. 2,000 - Rs. 0 = Rs. 2,000
1990: Actual Royalty = Rs. 650; Minimum Rent = Rs. 2,000
Shortworkings = Rs. 2,000 - Rs. 650 = Rs. 1,350
1991: Actual Royalty = Rs. 1,850; Minimum Rent = Rs. 2,000
Shortworkings = Rs. 2,000 - Rs. 1,850 = Rs. 150
1992: Actual Royalty = Rs. 2,250; Minimum Rent = Rs. 2,000
Since Actual Royalty > Minimum Rent, we have Excess Royalty = Rs. 2,250 - Rs. 2,000 = Rs. 250
1993: Actual Royalty = Rs. 3,500; Minimum Rent = Rs. 2,000
Excess Royalty = Rs. 3,500 - Rs. 2,000 = Rs. 1,500
1994 (Strike for 4 months):
Worked for 8 out of 12 months. Thus, reduced minimum rent = 12 8 × 2 , 000 = R s .1 , 333.33
Actual Royalty = Rs. 1,200
Shortworkings = Rs. 1,333.33 - Rs. 1,200 = Rs. 133.33
1995: Actual Royalty = Rs. 3,000; Minimum Rent = Rs. 2,000
Excess Royalty = Rs. 3,000 - Rs. 2,000 = Rs. 1,000
3. Preparing the Accounts:
(a) Royalty Account
Record actual royalties earned each year.
(b) Shortworkings Account
Record shortworkings against minimum rent each year.
Track recovery of previous shortworkings from excess royalties.
(c) Arun's Account (Payable Account for Royalties)
Pay (or schedule to pay) amounts for royalty and any cleared shortworkings.
Below is an outline for these accounts:
Royalty Account:
1989: Rs. 0
1990: Rs. 650
1991: Rs. 1,850
1992: Rs. 2,250
1993: Rs. 3,500
1994: Rs. 1,200
1995: Rs. 3,000
Shortworkings Account:
1989: Rs. 2,000
1990: Rs. 1,350
1991: Rs. 150
1992: Recovery of Previous Years
1993: Recovery of Previous Years
1994: Rs. 133.33
Arun's Account:
Payables for Royalty calculated minus recovered shortworkings.
Conclusion:
This setup will help Ram Co. Ltd to maintain an accurate record of royalties paid, shortworkings, and recoveries in their financial books. Proper tracking ensures fair compensation and maintenance of contractual obligations towards lease agreements.
