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When royalties are more than minimum rent, and the agreement provides a room
for recoupment of previous year’s short workings:
1. When production is Dr Royalty payable account xx
made or royalty is Cr Lessor account xx
payable With the actual royalty payable to the lessor
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2. When payment is Dr Lessor account xx
made Cr S/workings recoverable account xx
Cr Bank account xx
With the amount paid
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3. Closing the royalty Dr Income statement/Manufacturing account xx
expense account Cr Royalty payable account xx
With the balance of the royalty expense account
When short workings cannot be recouped in future:
Closing the short Dr Statement of P/L xx
workings account Cr Short workings recoverable account xx
With any outstanding short working whose recoupment period
is expired

Example 6.7
On 01 January 2020, Bali Ltd. acquired rights to extracts minerals from Nala Ltd. on
st
the agreement that Bali Ltd. would pay royalty of TZS 150 per kilogramme extracted.
There was no minimum rent charged by Nala Ltd. on the contract. The following table
presents the quantities of minerals extracted for a period of five years:
Year 2020 2021 2022 2023 2024

Output (kgs) 15,000 17,000 18,500 14,000 20,000

Required:
Prepare ledger accounts in the books of Bali Ltd. for a period of five years ending 31
st
December 2024.

Student’s Book Form Five
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