Page 175 - Accountancy_F5

Minimum rent and short workings

Minimum rent is the fixed amount that a lessee must pay to the lessor, regardless of the
actual usage of the asset. On the contrary, short workings occur when the actual rent
based on usage falls below the minimum rent, creating a shortfall that the lessee may
be allowed to carry forward and adjust against future excess payments.
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Minimum rent
Minimum rent in the context of royalties refers to a guaranteed or minimum amount of
payment that the licensee agrees to pay to the licensor regardless of the actual revenue
or profits generated from the exploitation of the property. This means that even if the
licensee does not generate revenue from the agreement, he/she is still obligated to pay
LANGUAGE EDITING
the minimum rent to the licensor. This minimum rent is also known as dead rent or
flat rent. Minimum rent is a sum of payment guaranteed to the lessor by the lessee in
order to make the lessor receive a minimum amount in any particular period, whether
the lessee derives any benefit from the lessor’s property or not. The minimum rent is
normally fixed at the time when the lessor enters into an agreement with the lessee. At
the end of the period, the lessee will be required to pay the minimum rent or the actual
royalty amount, whichever is higher.

Example 6.1
Kwetu Traders leased a machine for sunflower oil refining, from Ukuta Company.
The agreed minimum rent is TZS 36,000,000 per annum, merging a royalty of TZS
1,000 per refined litre of sunflower oil. In the first year, Kwetu Traders refined 48,000
litres, and in the second year 32,000 litres were refined.

Required: State the amount to be paid as royalty in the first and second years.

Solution 6.1:
Analysis table
Actual Minimum Royalty
TZS
Year Quantity in litre royalty rent paid
per litre
TZS TZS TZS
Year 1 48,000 1,000 48,000,000 36,000,000 48,000,000

Year 2 32,000 1,000 32,000,000 36,000,000 36,000,000

Therefore, the Kwetu Traders will pay TZS 48,000,000 at the end of the first year and
TZS 36,000,000 at the end of the second year.

Student’s Book Form Five
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