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QUESTION TWO (a) Explain the meaning of the following terms in the context of accounting for royalties; (i) Minimum rent (ii) Short workings (iii)
QUESTION TWO (a) Explain the meaning of the following terms in the context of accounting for royalties; (i) Minimum rent (ii) Short workings (iii) Recoupment of short workings (iv) Sub-lease (8,marks) (b) On 1st January 2015, Kelly leased a piece of land to Linda in 10 years to extract some natural resources. Linda sub-leassed one third of the land to Karis for 6 years on 1st January 2017. The lease agreement between kelly and Linda was for payment of sh. 1,500 per ton with a minimum rent of sh. 20,000,000 per annum. The power to recouped short workings was being the first 4 years following the year the short workings occurred. The lease agreement between linda and Karis was for a payment of sh. 2,000 per ton with minimum rent of sh. 2,000,000 p.a The right to recouped short workings was made for the first three years from the inception of the contract The following are the actual output for the last 7 years. Year end is 31st December, Year Linda Tons Karis Tons 2015 10,000 2016 12,000 2017 12,200 500 2018 14,000 800 2019 18,000 1,200 2020 24,000 1,400 2021 30,000 2,000 2022 33,000 3,000 REQUIRED Prepare following accounts (i) Royalties payment Account (00) Royalties Receivable Account (iii) Short workings Account (tenant) (iv) Sub-tenant Account (v) Short-working (sub-tenant) (17 marks)
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