ROYALTY

QUESTION ONE
Mining corporation Ltd obtained a lease

of coal filed for 99 years from Mr.

Landlord on the following terms from 1st January, 2010

(a) Royalty will be Shs 2 per tonne of coal raised during the period.
(b) Minimum rent will be shs 10000 for the first year with a annual increase of
shs 1000 till it reaches shs15000
(c) Shortworkings, if any, are recoverable within first 3 years only.
The coal raised by Mining Corporation is as under:
Year
2010
2011
2012
2013

Production
1000
2000
10000
15000

Shows necessary accounts in the books of Mining Corporation

QUESTION TWO
Mr. Paul develop a software package for a turnkey project for Offshore Drilling.
He granted Ms. Angel a licence for 7 years to use the software and sell the
same in Tanzania on the following terms
1) Ms. Angel should pay to Mr. Paul a royalty of shs 5 for each software
package sold with a minimum annual payment of shs 50000. Accounts
should be settled on 31 December.
2) In any year the royalties amounted to less than shs 50000. Ms Angel
should have the right to deduct the deficiencies from the royalities
payable in excess of that sum in the two following years. the number of
package sold were as follows
Year ended 31 December, 2010
Year ended 31 December, 2011
Year ended 31 December, 2012

8,000
9,000
11,000

Year ended 31 December, 2013

18,000
Your required to prepare:
(i) Royalty analysis statement;
(ii) Royalty account;
(iii)
Shortworkings account;
(iv)Mr. Paul Account in the book of Ms. Angel which are closed
annually on 31st December.

QUESTION THREE
Smoker, who had patented a tobacco filter, granted to Piper & Co a licence for
seven years to manufacture and sell the filter on the following terms:
(i)

Piper & Co. to pay a royalty of Tshs 1 for every 100 filters sold with a
minimum payment of Ths. 1,000 per annum. Calculations to be made

(ii)

annually as on 31 December and payment on 31 January.

If, for any year, the royalties calculated on filters sold amount to less
than Tshs. 1,000, Piper and Co. may set off the deficiency against
royalties payable in excess of that sum in the next two years.
The number of filters sold were:

19x1
19x2
19x3
19x4

Year to 31 December
60,000
80,000
120,000
140,000

You are required to show the ledger accounts recording the above transactions
in respect of royalties in the books of Piper and Co, which are closed annually
on 31 December.

QUESTION FOUR

T.T owned the patent rights for a bottle opener. On 1 April 19x2 he granted
O.B. & Co. Ltd.

a licence for ten years to manufacture and sell the bottle

opener on the following terms:

(i)

O.B. & Co. Ltd were to pay T.T. a royalty of 50P for each opener sold.

(ii)

The minimum royalty for each of the first three years covered by the
licence was to be Tshs. 500

(iii)

If royalties on openers sold amounted to less than Tshs. 500 O.B. &
Co. Ltd were entitled to deduct the deficiency from royalties in excess
of that sum payable in respect of each of the first three years of the

(iv)

agreement.
After the first three years royalties were to be payable on the actual

(v)

number of bottle openers sold each year.

Accounts were to be settled to 31 March in each year

The numbers of bottle openers sold in the first four years were as follows:
Year ended 31 March
19x3
19x4
19x5
19x6

860
980
1,090
1,050

Show the accounts relating to the above transactions in the books of O. B. &
Co Ltd for the first four years of the agreement.
QUESTION FIVE
Some years ago Dunbar Ltd had been granted a licence to extract a mineral
deposit from some land owned by Berwick plc. The terms of the licence were as
follows:
1. Dunbar Ltd was to pay Berwick plc a royalty of shs. 2 for each ton of
mineral deposit extracted, subject to a minimum payment of shs. 10,000
per annum

2. If in any year, the total amount of mineral extracted was less than 5,000
tons, Dunbar was to be allowed to recoup any deficiency against royalties
payable in excess of that amount during the following two years.
3. Both Dunbars and Berwicks financial year end is 31 December, and
Dunbar agreed to settle the amount due to Berwick on the next 31
January following the financial year end. During the first five years of the
agreement, the following tons of mineral deposit were extracted by
Dunbar.

Year to 31 December
19x1
19x2
19x3
19x4
19x5

Quantity in Tons
6,000
4,000
3,000
5,500
8,000

QUESTION SIX
Shipton, who had patented an automatic door closer, granted Doors Ltd a
licence for ten years to manufacture and sell the door closer on the following
terms.
(i)

(ii)

Doors Ltd to pay a royalty of shs 1 for every closer sold with a
minimum payment of shs 500 per annum. Calculations to be made
annually as on 31 December and payment to be made on 31 Januar.
If, for any year, the royalties calculated on closers sold amount to less
than shs 500, Doors Ltd may set off the deficiency against royalties
payable in excess of that sum in the next two years.

With effect from the end of the second year the agreement was varied and a
minimum annual payment of shs 400 was substituted for shs 500, the other
terms of the annual agreement remaining unchanged.
The number of closers sold were:
Year ended 31 December
19x2
19x3

200
400

19x4
19x5

600
500

You are required to show the ledger accounts recording the above transactions
in respect of the royalties in the books of Doors Ltd which are closed annually
on 31 December.

QUESTION SEVEN
Laurie Ltd (sand and gravel merchants) entered into an agreement to purchase
from sands Ltd over a period of five years such quantities of sand as they might
require from time to time and which they were to extract from a snad pit
belonging to Sands Ltd on the following terms:
1. Laurie Ltd to pay a royalty of 10p per ton all material extracted with a
minimum rent of shs. 2,000 per annum.
2. If, for any of the first three years, the royalties o nsand extracted fall sort
of the minimum rent, the shortfall is be set off against any royalties
payable in excess of the rent for those three years.
3. The following quantities were extracted:
Tons
First year
Second year
Third year

4,000
16,000
28,000

Prepare the ledger accounts recording these transactions in the books of Laurie
Ltd, assuming that the payments due for any year were made during the
following year.
Income Tax is to be ignored.
QUESTION EIGHT
Lugg Limited received the rights to manufacture and market a commemoration
plate from Wyke public limited company.

Lug agreed to pay Wyke shs 2 per plate sold, subject to a minimum annual
payment of shs 100,000. Any shortfall in the minimum annual payment is to
be recovered within two years following the year in which it arises. During the
first five years of the agreement, Luggs sales were as follows:
Year to 31December
19x4
19x5
19x6
19x7
19X8

Number sold
30,000
40,000
60,000
70,000
45,000

The amount due to be paid to Wyke in respect of amounts owing as at 31

December was to be paid on 31 January in the following year
Required:Record the above transactions in Luggs books of account using the following
ledger accounts:
(i)
(ii)
(iii)

Royalties payable;
Wyke plc (patent holder); and
Short working s recoverable account.

(Note; Be careful to balance each account at the end of the respective

financial year, and to bring down the appropriate balance).
QUESTION NINE (SUB-LEASE)
On 1st january, 2009, Paul patentee of a new type of article required in
Engineering concern, issued a licence to Anneth for 5 years for manufacture
and sale of the article on the following terms and conditions:
(a) royalty of shs 5 per article manufactured
(b) Minimum rent of shs 5000 per annum
(c) Recoupment of shortworkings out of royalties in excess of minimum
rent during the two years immediately following subject to a
maximum of shs 2000 per annum
(d) accounts were to be settled annually on 31st december.

The number of articles manufactured for the five years was as follows
Year
Nos.
2009
100
2010
1100
2011
2600
2012
400
2013
2200
You are required to show the
1) Royalties Accounts
2) shortworking account and
3) Paul accounts in the books of Anneth
QUESTION TEN (SUB-LEASE)
The Tanzanian Mineral Ltd. hold a lease of a mine for period of 40 years from
1st January 2010. A royalty at the rate of 50 cents per tonne merging into
minimum rent of shs 20000 a year, is payable half on 30 June and 31
December.

They granted a sub lease for 20 years from 1st July 2010, to

APAMA & Co. Ltd. The sub lease was of half of the area of land for royalty of 75
cent per tonne merging into minimum rent of shs 15,000 a year, payable half
yearly on 30 June and 31 December. The Tanzanian mineral ltd. are entitled to
recoup the shortworkings out of the subsequent excess working throughout the
term of the lease but, under the sub-lease, APAMA and Co. Ltd. are entitled to
recoup shortworkings, out of excess working only in any of the three years
immediately following the year in which shortworkings occurred. Mineral raised
were as follows:

Half and ended on

30.6.2010
31.12.2010
30.6.2011
31.12.2011
30.6.2012

TZ Mineral Ltd. (Tonnes)

5000
14000
24000
13000

APAMA and Co. Ltd.(Tonne)

5000
6000
6000
12000

You are required to show the Royalties accounts and shortworkings accounts
both under the lease and the sublease. in the books of Tanzanian Minerals Ltd
which are balanced yearly on 30th June

CONTAINER
QUESTION ONE
D. Clarks manufactures are sold in boxes which are returnable. They are
charged out to customers at shs 8 each and credit of shs. 6 is given for each
box returned within two months. For the purpose of the annual accounts, the
value of boxes in the factory and those in customers hands, which had been
invoiced within two months, was taken as being shs 1.50 each. The quantities
of these on 31 January 19x3 were 600 and 4,000 respectively.
The following were the transactions as regards boxes during the year ended 31
January 19x4
Purchases 5,000 at shs 2 each
Invoiced to customers 17,000
Returned by customers 14,000
450 could no longer be used and were sold, realising shs 100
The number of boxes invoiced after 30 November 19x3 and still in customers
hands on 31 January 19x4 was 6,200

Write p the accounts in the books of D. Clark to record these transactions and
to show the profit on boxes and the quantities involved.

QUESTION TWO

A company makes a charge to its customers for cases in which the product is
delivered. If they are returned in good condition within two months a refund is
made. At the start of the year there were 9,600 cases in stock at the companys
warehouse and 6,100 in the hands of customers supplied within the previous
two months. The company bought 1,000 new cases during the year and
following a dispute with a supplier returned 4,000 new case for which a credit
note of shs. 11,610 was received. At 31 December 19x6 there were still in the
hands of customers 4,800 supplied during the previous two months.
During the year 19x6, 47,600 cases were sent to customers and 43,100
returned by them. The company scrapped 3,500 damaged cases and sold the
timber for shs 55. A physical check of cases in stock in 31 December 19x6
revealed an unaccounted deficit of 420 cases.

New cases cost shs 3 each

Charged out to customers at shs. 5 each
Credited on return at shs 4 each
Value for stocktaking at shs 2 each

Show the accounts in the books for 19x6 to record the above, and the balances
of cases, in quantities and values at 31 December 19x6
You are entitled to deduce the following missing information from the details
above:
(a) The number of cases kept by customers over the two-month limit for
returning them.
(b) The number of cases in the warehouse on 31 December 19x6
QUESTION THREE
S Limited delivers its product to customers in returnable containers. These are
invoiced to the customer at shs 20 each and, if returned in good condition

within six months, are credited in full. The containers are purchased for shs 10
each.
At 30 Jun 19x6, there were 2,000 containers held in S Limiteds warehouse
and provision was made in the 19x6 accounts for an estimated liability in
respect of 5,500 containers in customers hands. During 19x7 1,250 new
containers were purchased and 120 were scrapped. 8,750 containers were
charged to customers and 9,050 containers were returned within the sixmonth period.
At 30 June 19x7, the physical stocktaking showed 3,390 containers in the
warehouse and information derived from customers indicated that there was a
potential liability in respect of 4,950 containers. The stocks of containers are
valued at cost price.
Required:Prepare the containers stock account and the containers suspense account
necessary to record these transactions in the books of S Limited.