L.C.OBARAcPh.

D)
 /
/ ...........-..
'\
( ., ..oout: the Author
i .----------....----------------.
I
Lett.Obara holds a Doctor of Philosophy degree
in Ac<:o~tCUlcyfromthe;' Rivers State University of.
'~ci~n<;;e'<?qdTecfmofogy,Nkpolu, Port Ha rcourt.

',He... has; been:e.:t;$~:t 'JedUrer . in' the Deportment of'

. Accountancy, F(JCUlty of Management Science, Rivers
State UniverSTf1,;j'Qf,,$cience and Technology' Port
Horcourt since 1990 ond He is currently the Head of
Department. '

He is also the CtI~~f Consultant of Global Konsult, Port

Harcourt. . ., .

He ' has. outhored/co-authored books as well as

contributed to several articles in academic journals and
books of reading Accountancy and Finance.

i
_LIAbo~ ~
~he aaa~ ~ .
I
I
This text is an o'ttempt to present an up-to-date arid,
~.. integrated vfeWbf"ffte Principles' and Practice of
~.. Miscel:16~cU's> Accovnts. The concepts and
te~~~<;t~ilf~~s)jftlv<)l~inthese specialized .oreos are
... ,~UYi:,p,.esented and comprehensively
":if~O;f~G to enhance the understanding of the
.. ~~;/.,; ~i~t
:~t· {.:,:;,:.:">':'.>.,:':I~~'~;

ISBN: 978-2009·36·21 02-10-11

9 7 8 9 7 8 2 0 0 9 3 6 4 II 21

AGIPEA GLOBAL SERVo LTD. RIVCAS. RUMUOLA. PH

Tet: 08023690701. 08064669442
 Miscellaneous Accounts:
Principles and Practice

L.e. Obara
B.Sc., MBA, CPA, MNIM, Ph.D

Department of Accountancy,
Rivers State University of Science and Technology
Nkpolu, P.M.B. 5080, Port Harcourt

AGIPEA GLOBAL SERVo LTD.

Sonite Publishers Limited
89 Afikpo Street Mile 1, Port Harcourt. Rivers State.
Tel Fax 234-84-573375,08037867442.08053102821
E-mail:[email protected]

Copyright ©2001. i.c. OBARA

1st Printing - 2001
2nd Printing 2004
3rd Printing - 2006
Department of Accountancy
Rivers State University of Science and Technology,
Nkpolu, Port Harcourt.

Miscellaneous Accounts:
Principles and Practice

All Rights Reserved. No part of this publication may be reproduced, transmitted,

transcribed. stored in a retrieval system or translated into any language or
computer language, in any form or by any means, electronic, mechanical,
chemical, thermal, manual or otherwise, without the prior consent in writing of
the Publishers.

This book is sold subject to the condition that it shall not by way of trade, or
otherwise, be lent, re-sold, hired out, or otherwise circulated without the
publisher's prior consent in writing, in any form of binding or cover other than in
which it is published and without a similar condition, including this condition,
being imposed on the subsequent purchaser.

ISBN 978-2009-36-21

Printed and published

in the Federal Republic of Nigeria by

AGIPEA GLOBAL SERVo LTD.

RIVCAS, Rumuola, Port Harcourt.
Tel: 08023690701,08064669442

11
 DEDICATION

To my beloved Wife,

FAITH ULOMA OBARA

&

My dear son,

SAMUEL CHUKS OBARA (JR.)

11l
 ACKNOWLEDGMENTS

The materials in this book have been used to' teach Miscellaneous Accounts in
Nigeria to several sets of undergraduate accounting students at the Rivers State :'\fm~w
University of Science and Technology. In the process, the materials have i:: mo~

benefitted immensely from the comments and queries of past students in the toprcs
Department of Accountancy and department of Business Education. I "Misee
acknowledge this contribution. a gooc

The immeasurable contributions of all my lecturers throughout my university 1: is tl

education is also acknowledged. These men and women imparted on me, the A.::oOI[;JJ
knowledge of Accountancy in general and financial Accounting in particular. becaas
They include Chief (Dr.) J.J.M. Braide, Chief E. O. Obele, Mr. N.A. Ukpai and befoee
Mrs. Grace Umoh to mention but a few. I'll always remain grateful to them and perrine
several others who made me what I am today. unders

I specifically thank the following friends and colleagues: Messrs B.D. Kiabel, The (II
L.A. Nwanyanwu, T.A. Keme, Bassey Eyo, Furo Harrison, D.l. Hamilton and thcrdii
several others, for their encouragement and advice.
:'\.A.. {
My younger one's Engr. Okey, Eze, Paul, Ijeoma, Charity, Eunice, Cathrine, Joy Head..
and Beauty deserve serious commendation for their assistance and prayers. DepaiIIl1
Rivers
I am grateful to the Institute of Chartered Accountants of Nigeria (1CAN), and ),~w
West African Examination Council (WAEC) for allowing me to use their past
examination questions. I am also grateful, to Nigerian Universities Student
Association (NUASA) and my Operation Manager (Faloa Nigeria Limited) Miss
Iriabo Batubo.

Finally, I must not lose sight of the immense contribution of my wife, Mrs. F.U.
Obara, whose warmth, patience and sacrifice have helped to bring this book
project to reality. Above all, I thank God Almighty who, alone, made this feat
possible.

L.C Obara

IV

,
,"
..
.•.
-,
' .•... "'
 FOREWORD
Many Financial Accounting issues arc not adequately and independently treated
in most accounting texts. They are either mentioned in the discussion of major
topics or completely neglected. These issues are collectively referred to as
"Miscellaneous Accounts." The understanding of these accounts is a necessity for
a good foundation in the study of Financial Accounting.

It is for these reasons that L.c. Obara's effort in producing Miscellaneous

Accounts: Principles and Practice is highly commended. This book is unique
because of its comprehensive coverage of Financial Accounting issues that are
before now dis-jointly treated. The author has kept the book simple enough, with
pertinent practice examples and problems at the end of each chapter, to be
understood by undergraduate students of tertiary institutions.

The content of this book commends itself for reading by all accountants. I,
therefore recommend it to both students and practicing accountants.

N.A. UKPAI
Head,
Department of Accountancy,
Rivers State University of Science and Technology,
Nkpou, Port Harcourt.

v
 PREFACE
Miscellaneous Accounts: Principles and Practice is a genuine attempt to solve the
problem of lack of literatures in this specialised area of accounting practice. It is
very difficult to see a single text that thoroughly and adequately treats these
miscellaneous accounting issues. My experience in the past eight years as a
lecturer in this specialised area reveals that authors of financial accounting
textbooks have consistently handled miscellaneous accounting issues in a
disjointed pattem. Some of them either treat one or two of such issues and others
will not mention them at all. It is against this backdrop that the motivation to
write this text was developed.

The text is an attempt to present an up-to-date and integrated view of the

Principles and practice of Miscellaneous Accounts. The concepts and
technicalities involves in these specialised areas are conceptually presented and
comprehensively illustrated to enhanced the understanding ofthe subject.

This book will be found useful to all grades of students, both in the polytechnics
and universities, who are offering courses in Financial Accounting. The materials
has been arranged to allow flexibility of usage by both students and instructors.
The end-of-chapter revision questions are meant to stimulate the student further
in his/her effort to consolidate his/her understanding of the subject.

The text is organised into two parts ­

1. Part 1: Principles and Practice of Miscellaneous Accounts

2. Part 2: Questions and Answers on Miscellaneous Accounts

It is hoped that this arrangement will consolidate the student's understanding of

the subject, the more.

Suggestion and comments from users of this book will be appreciated

L.C.OBARA
Department of Accountancy
Ri vers State University of Science and Technology
Nkpolu, Port Harcourt.

VI

..
 CONTENTS
Dedication 111
Acknowledgement iV
Foreword V
Preface Vi

Chapter 1
Joint Venture Accounting
Nature of Joint Ventures
Main Characteristics
Accounting Procedure
Revision Questions

Chapter 2 11
Royalty Accoun ts
Minimum Rent
Short working
Summary of General Principles
Sub-Royalties
Revision Questions

Chapter 3 22
Consignment Accounting
Difference between a Consignment and Sale
Specialised Accounting Terms used in
Consignment accounting
Accounting Procedure
Consignor's Records
Consignee's Records
Revision Questions

Chapter 4 34
Bills of Exchange Accounting
Introduction
Advantage of a Bill
Types of Bills
Parties to Bill
Draft and Acceptance
Legal Liability of Parties to a Bill
Accounting Procedures
Bills held until maturity

VB
 Discounting Bills with the Bank
Negotiating the Bill to another person
Treatment of Dishonoured Bills
Promisory Notes
Parties to a Note
Kinds of Notes
Differences between Promissory Note and Bill of Exchange
Revision Questions

Chapter 5 49
Hire Purchase Accounts
Legislation Affecting Hire Purchase
Accounting Treatment
Hire Purchaser's Book
Vendor's Book Repossession and Returns
Revision Questions

Chapter 6 58
Departmental Accounts
Advantages of departmental Accounts
Allocation of Expenses
Inter- Departmental Transfers

Chapter 7 72
Accounting for Containers and Cases
Non- Returnable Containers and Cases
Returnable Containers
A charge made to customer
Revision Questions

Chapter 8 79
Accounting for Incomplete Records (Single Entry)
Conceptual Overview
Pure Single Entry
Single Entry in the popular sense ... ~

Limitation of Single Entry

,j Conversion of single Entry into Double Entry
Revision Questions

Chapter 9 99
Investment Accounts and Manager's
Commission on met profit
Operating Arrangement

Vlll
 1
Accounting Arrangement
Purchase of Investments
Sale of Investment
Profit or Loss on Sale of Investments
Balancing Investment Accounts
Manager s Commission on Net Profit
Revision Questions

Chapter 10 115
Branch Accounts
Accounting Arrangement
Home Branch Accounts
Overseas Branch Accounts
Branch Transactions Recorded at Head Office
Transfer of Goods to Branches
Branch Receipts and Payments
Where goods are sent to Branches on Cost Price
Goods charged to Branches at cost plus a percentage
Goods charged to Branches at selling price
Credit Sales by Branches
Where the Branch has full System of Double Entry
Inter- Branch Transactions
Revision Questions

Chapter 11 142
Fire Insurance Claims For Loss of Stock, Loss of Profits
Insurance, and Compensation Claims
Fire Insurance Claims for Loss of Stock
Factors to be considered in preparing claims
Fire Insurance Claim
Loss of Profit Insurance
Compensation Claims
Revision Questions

Chapter 12 153
Long -Term Contract Accounts
Types of Expenses
Direct Expenses
Indirect Expenses
Progress Payment
Accounting Procedures
Archi tects/Engineers Certi ficate Method
Work in Progress Method

IX
 Calculate or Profit on Uncompleted Contract
General Notes on the Profit taken up
Loss on Contract
Approved Variations and Claims
Revision Questions.

Chapter 13 168
Receipts and Payments Accounts,
and Income and Expenditure Accounts
Receipts and Payment Accounts
Income and Expenditure Account
Preparation of Receipt and Payment accounts from
Income and Expenditure account.

Chapter 14 182
Joint Venture Accounts
Consignment Accounts
Royalty Accounts
Hire Purchase Accounting
Fire Insurance Claim, for Loss of Stock
Accounting for Containers and Cases
Departmental Accounts
Branch Account
Investment Account
Contract Account
Incomplete Record

References 241

Index 242

..;t

;~
 Miscellaneous Accounts: Principles and Prnriir e

CHAPTER 1

Joint Venture Accounting

There are times when it may be to the benefit of two or more persons or business
organizations to act together for a particular undertaking instead of cngaging in it
separately. This undertaking is known as a Joint Venture and its working is
similar to a partnership. In fact, a joint venture can be better described as a
partnership without the use of a company or business name, limited to a
particular speculation in which the persons concerned agree to contribute capital
and to share profits or loses. There is nothing to stop the same individuals or
business from entering into a series of Joint Ventures, but each will be treated as
a separate venture.

A. Nature of Joint Ventures

A Joint Venture may consist of a joint consignment of goods, an underwriting
transaction, a speculation in shares, or any similar form of enterprise. Nowadays
joint ventures are often concerned with one isolated transaction, such as buying
up fairly used cars, bankrupt stocks or engaging in similar operations.

B. Main Characteristics
Because of their temporary nature, no separate books are kept to record the
transactions after each venture keeps a record of his part of the enterprise in his
normal account ting records.
1. The profit-sharing ratios must be clearly defined.
2. The capital activities and scope of venture must be bid down, e.g.
sometimes one venture does the buying and the other the selling, but often
both make a capital contribution.
3. Sometimes one venture is allowed credit for the use of his office or for
services provided but this must be agreed to by all parties.

C. Accounting Procedure
There are two approaches of incorporating the joint venture in the books. The
first approach consists of opening a single account called the joint venture
account and shows only the transactions relating to the person in whose books the
account is opened. The second approach involves two or more accounts. These
being a joint venture account ad personal accounts relating 0 the other venturers.
In this second approach all transactions relating to the venture are recorded in
each venturer's books. Students should be careful to ensure that the correct
approach is given when answering examination questions.
 MiscJTancolIs Accounts: Principles and Practice

Illustration 1.1
Eze and Neche entered into ajoint venture to buy and sell sports equipment. They
agree to share profits in the ratio 6:4. Details of the transaction are:
W
Eze supplied equipment costing 8,000
Neche supplied equipment costing 4,000
Eze paid storage expenses 500
Neche paid selling expenses 1,200
Eze received cash from sales 9,000
Neche received cash from sales 11,000
Eze paid advertising expenses 300 'J

Approach 1
Under this approach it will be necessary to compile a memorandum joint venture
account made up from particulars supplied by each venturer. Although it may be ,l\,
entered in the books of each venturer, it does not form pari of the double entry. Ibm
Its purpose is to determine the profit made on the venture. lI/iW
Memorandum Joint Venture Account
W w 111
Sport equipment Cash Sales
Eze 8,000 Eze 9,000
Neche 4,000 12,000 Neche 11,000 20,000
Expenses c:~
Eze - storage 500 ]Eu;
Neche-selling 1,200 StY,
Eze-advertising 300 2,000 Jw
Profit divisible
Eze Q. 3,600 1m
10
Neche 1 2,400 6,000
Sf
1&
10 20,000 ~ 20,00Q ~
Having calculated the profit it can be included in each Venturer's Book's. E]
Di
In Eze's Books Pm
Joint Venture
"
with Neche
--~-- Ni
w w \PIa
Cash - Sport
Equipment 8,000 Cash - Sales 9,000
Storage 500 Balance 3,400
Advertising 300
Profit on venture (a) 3,600
illOO 12..4QQ

, 'J;..,
~"'
,~-------- - - - - - - ' - ,- ­
 Miscellaneous ACCOlIIlls: Principles and Prcc r:«

In Neche's Books

Joint Venture with Eze

W
Cash - Sport Cash - Sales 11,000
Equipment 4,000
Selling Expenses 1,200
Profit on venture (a) 2,400
Balance c/d 3400 1l..QQQ 11,000

It can be seen from the two accounts above that Neche owes N3,4". To close off
the venture, Neche should pay Eze this amount:
(a) In Eze's books debit Cash, credit Joint Venture Accoant
(b) In Neche's books credit Cash, debit Jolnt Venture are recorded

Approach 2
In this approach, all transactions relevant to the joint venture are recorded in each
venturer's books.

In Eze's books

Joint Venture with Neche

W
Cash - Sport Cash - Sales 9,000
Equipment 8,000 Transfer Neche's
Storage 500 Personal AlC
Advertising 300 8,800 Sales 11,000

Transfer Neche Personal

Sports
Equipment 4,000
Selling
Expenses 1,200 5,200
Divisible profit
Profit and Loss 3,600
Neche's
Personal AlC 2,400 6,000
20,000 20,00Q

3
 Miscellaneous Accounts: Principles and Practice

Neche
W•
Personal----~-----~-
w iCIC

Transfer to Transfer to cIh

Joint Venture AlC Joint Venture AlC fJII

Sales 11,000 I Sports Equipment 4,000 1IlIhJ

Selling Expenses 1,200 C

Profit
Balance
2,400
3,400
•
11,000 1LOOO l
_..
..",

~,

Balance 3,400 .)!"

In Neche's books • ..at

Joint Venture with Eze
N W
Cash - Sport
Equipment 4,000
Cash - Sales
Transfer Neche's
11,000 •
l;
Storage 1,200 5,200 I Personal AlC ft
Sales 9,000
"1
Transfer Eze Personal AlC l -,

Sports o
Equipment 8,000 II
Storage 500 U
Advertising 300 8,800 011
Divisible Profit til
Profit and Loss 2,400 1011
Eze's personal 3,600 6,000 On
20,000 20,000 til
I!mDm

Eze's Personal Account

l'~
W w
Transfer to Joint Venture AlC 9,000 Transfer to Joint AlC
«(:l1li
Balance 3,400 Sports equipment 8,000
Storage 500
Advertising 300 if'~

Profit 3,600
12.400 12.400
Balance 3,400 E\

The results in each approach are identical. The amount due between venturers to ''n'
settle the venture is shown in the Joint Venture Account in Approach One,
whereas it is brought down in the Personal Account in Approach Two. To

--_. -- -­
 Miscellaneous Accolillts: Principles and Practice

compensate of the additional entries necessary in Approach Two, the benefit is

that all transactions are incorporated in the books of account. In practice, the
entries in the Joint Venture Account would be in chronological order instead of
the summarized form shown in the example.
Certain refinements may have to be made to the basic structure of joint venture
accounting to deal with the following circumstances:

1. Cash paid by one venturer to another during the course of the joint venture
2. Sales made by any of the venturers on credit basis.
3. Stock taken out of the joint venture by one of the parties for his own use.
4. Where the period of the venture extends beyond the accounting year of any
of the venturers.

Illustration 1.2
Uloma and Ona enter into a joint venture to buy and sell painting. They agreed to
share profit equally. A summary of their transaction is:

Uloma bought paintings 3,000

Ona bought painting 4,000
Uloma paid renovation expenses 1,500
Uloma paid cash to Ona on Account 1,000
Ona paid selling expenses 500
Uloma received cash from sales 8,000
Ona sold painting on credit 5,000
Ona received cash from debtors 3,000
Uloma retained a painting for
his own use valued at 1,000

Using Approach 1

(a) Memorandum Joint Venturer Account

Painting Sales
Uloma 3,000 Uloma 8,000
Ona 4,000 7,000 Ona 5,000 13,000
Expenses Painting Acquired 1 1,000
Uloma 1,500 by Uloma
Ona 500 2,000
Profit
Uloma 2,500
Ona 2,500 5,000
14,00Q 14,000

5
 Miscellaneous Accounts: Principles and Practice

There is no need to enter the cash transfer between Uloma and ana. l
In Uloma's Books. b
Joint Venture Account with Ona
W W
Cash -paint 3,000 Cash - sales 8,000
Renovation Expenses 1,500 Transfer Drawing
Cash to ana 1,000 (Painting acquired for
Profit 2,500 Personal use) 1,000
Balance 1,000
9,000 9,000
Balance 1,000 fli",..

Note:
In the above account the painting acquired for personal use has been transferred
to drawing account. In other circumstances it would be transferred to purchases if
it was the type of goods sold in the normal course of the ventures business, or
transferred to fixed asset account if relevant.

In ana's Books
TI!!':~
Joint Venture Account with Uloma
Cr'~
W W
ClIIIlf
Cash- Paintings 4,000 Credit Sales 5,000
RilILl
Selling Expenses 500 Cash received from Uloma 1,000
profit 2,500 Balance 1,000
7,00Q 7,000
SltIJ1l
Balance 1,000
n~~

Joint Venture Account with Uloma

W W "41
Credit Sales 5,000 Cash 3,000
Balance 2,000 ez:
5,000 5,000
Sdk
Balance 2,000 T:II":mrr
P':ilIlli.lII
RIf.'lD11
Note: E,~;;!I
Although the debtors have been shown in a total account, in fact separate
accounts should be opened for each debtor. Thus, Ona is owed Nl 000 by her co­
venture, and N2000 by debtor. It may be advisable to wait until all cash has been
received from the debtors before calculating the profit in case any bad debts are
suffered.

~c.

~f
d
~> •
 Miscellaneous Accounts: Principles and Practice

Using Approach 2
In Uloma's Books
Joint Venture with Ona
W W
Cash - Painting 3,000 Cash - Sales 8,000
Renovation Transfer
Expense 1,500 4,500 Credit Sales 5,000
Transfer - Ona :
Painting 4,000 Drawing:
Selling expenses 500 4,500 Painting taken over 1,000
Profit:
Profit and
Loss NC 2,500
Ona 2,500 5,000
14,000 14,000
,1M
Ona's Personal Account

Transfer J/V Account: Transfer to J/V Account:

Credit Sales 5,000 Paintings 4,000
~ Cash Paid to Ona 1,000 Selling Expenses 500
:)10101 Balance 1,000 Profit 2,500
,l!)II~() 7,00Q 11,000
-
IG)IIOI(C)
~i~(~))i1D
Note:
The N1000 paid by U10ma to Ona is debited directly to Ona 's personal account.

In Ona's Books
Joint Venture Account with Uloma
w W
Cash - Painting 4,000 Debtors
Selling Expenses 500 4,500 Credit Sales 5,000
Transfer Uloma's Cash Sales 8,000
Paintings 3,000 Painting taken over 1,000 9,000
Renovation
Expenses 1,500 4,500
Profit:
Profit & Loss
been Account 2,500
Irs .1I"e Uloma 2,500 5,000
lAJlliO 14,000

7
 Miscellaneous Accounts: Principles and Practice

Uloma's Personal Account

N N
"ll'
Transfer Joint Venture Transfer Joint
"",
Account: Venture Account: ..;lI

Cash Sales 8,000 Paintings 3,000

Painting taken over 1,000 Renovation 4.
Expenses 1,500
Profit 2,500
Cash received from
,]~11l\

­-,
Uloma 1,000
Balance 1,000 ,bun
~oo 9.000
Balance 1,000 IllllIIIl
.JIIlaamn,

-,_I
Joint Venture Debtors
N N
Credit 5,000 II Cash received 3,000 .Iaumn,
Balance 2,000
5.000 5.00Q
Balance 2,000 ¥.
Where the venture extends beyond the financial year end, an interim statement ~
should be prepared showing the profit earned at that stage. The balance of unsold
stock should be brought down on the Joint Venture Account to continue the
undertaking in the following accounting period. The profit earned should be
credited to the Profit and Loss Account and any balances entered in the
Venturer's own Balance Sheet under current assets or current liabilities.
..
1UfImm
,~

WIu
When the venture is of such magnitude as to warrant a separate bank account, the
venturers will each pay in an agreed amount.
All dealings are then paid from or into this bank account. Books of account are
•
opened and when the venture is completed Final Accounts will be drawn up. The
balance in the bank will be distributed to the ventures according to their
entitlements which should then close all the remaining balances in the joint
venture ledger.
The entries required in the venturer's own books will be:

~ilDlIIW
Joint Venture with XY
N N dJnIDm
Cash paid into joint Cash received from IImnl!\w
Venture Bank Account xx II Joint Venture Bank
Transfer: P/L on Venture xx Account xx 11'1.
Il1IIl1iJmnlt!
xxx xxx

l~· ·. :i:,
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tP
 Miscellaneous Accounts: Principles and Practi.::

Revision Questions
1. What is a Joint Venture
2. How does a Joint Venture differ from partnership?
3. What is the function of the "Memorandum Joint Venture Account" and
when is it prepared?
4. Ogu and Jennifer enter into a Joint Venture to buy and sell Belgium cars.
They agree to share profit equally. The following is a list of their
transactions.

Jan. 1 Ogu bought Belgium cars at an auction for 4,200

Jan. 1 Ogu paid storage charges of 350
Jan. 6 Jennifer paid for repairing and renovating Belgium cars 1,250
Jan. 12 Ogu paid advertising and sundry charges 480
Jan. 22 Jennifer bought Belgium cars costing 1,500
Jan. 25 Jennifer paid selling expenses amounting to 560
Jan. 31 Ogu received for sale of Belgium cars 6,000
Jan. 31 Jennifer received for sale of Belgium cars 5,700

You are required to write up in each venturers books the accounts necessary to
show all the transactions of the Joint Venture including the final cash settlement
between the venturers.

Usman and Ayeni enter into a joint venture to buy and sell diamond rings. They
agree to share profits in the ratio of 2: 1 respectively. Each venturer is also
allowed to receive a commission of 10% on the sales made by him. The
following is a list of their transaction.

April 1 Usman bought goods for 12,500

8 Ayeni bought goods for 8,500
8 Usman paid insurance charges of 1,200
9 Usman paid for packaging material 800
15 Usman sent a cheque to Ayeni 3,000
28 Ayeni paid sales expenses 1,400
30 Usman received cash from sales 24,000
30 Ayeni received cash from sales 14,000

You are required to write up in each venturer's books the account necessary to
show all the transactions of the joint venture including the final cash settlement
between the venturers.

h Joe and Faith were partners in the following scheme, Joe to take five­
:-.~:-:::-:s and Faith four-ninths of the profits. They agree to guarantee the

9
 Miscellaneous Accounts: Principles and Practice

subscription at par of 85,000 shares of WlO each in a company, and to pay all
expenses up to allotment, in consideration of the company's issuing to them
11,500 other shares fully paid. Joe provided cash for registration and fee N1140;
advertising N21, 150, printing and prospectuses W2,250.

Faith paid cash for rent of office N400; Secretary etc N950; petty cash and
sundries W250; stamps N780, Solicitor's charges N250. Applications fell short of
the 85,000 shares by 3500, and Faith paid in full for that number on the joint
account. The company handed Joe and Faith the 11,500 share. They then sold all
their shares at N8.20 each, less brokerage ofW 0.20 per share.

Faith received the net proceeds of 5000, Joe of I0,000. Prepare joint account and
separate accounts of the partners, showing their shares of profit, and the amount
due to each other in settlement.

7. Arit, Ukpe and Bassey enter into a joint venture to buy and sell electrical
goods. They agree to share profit 4:3:3 respectively. The transactions were
as follows:
N
May 1. Arit bought radios paying by cheque 3,300
1. Ukpe paid insurance charges 900
3. Bassey bought record players paying by cheque 2,100
6. Ukpe paid selling expenses 350
7. Arit bought records for sales costing 700
8. Arit bought plugs, connectors etc for 550
18. Bassey bought radios paying by cheque 1,400
25. Bassey paid incidental expenses 260
26. Ukpe bought packaging materials 140
30. Bassey received cash for sales 2,500

Arit took over the unsold stock for use in his own business valued at 1,000

You are required to show the accounts necessary to record all the above
transactions in the books of Bassey, showing the cash adjustment necessary to
close the joint venture.

10
 Miscellaneous Accounts: Principles Gild Pr';L-:.:'­

CHAPTER 2

Royalty Account

A Royalty is an amount payable to the owner of an asset in exchange for the right
to use it, the payment varying with the usage. The term originated in the royal
right over minerals (especially) which was granted to an individual or
corporation.

The Chief forms of royalty are:

1. Mining Royalties
2. Patent Royalties and
3. Copyright Royalties

These are based-respectively upon ore raised, product sold, and books sold. There
are many other variables, but the student's attentions may be confined to those
mentioned above.

Minimum Rent
In the case of mining and similar Royalties, a considerable time must elapse
before production can commence on a commercial scale, while similarly in the
other instances considerable time must pass before sales can take place, for
instance, a lengthy advertising campaign is undertaken. In order to afford some
reward during this intervening period to the lessor, inventor, or author, while
avoiding hardship to the producer, an arrangement is usually entered into
whereby the former is guaranteed a minimum sum designated Minimum Rent.

This is a guaranteed minimum amount which the land lord, or owner of the
copyright, is to receive.

If is often payable only in the first years of the agreement when actual production
may not have reached normal levels. It may also be a safeguard against a
company acquiring rights which it does not intend to use.

Short Workings
The concept of Minimum Rent is usually accompanied by a proviso that if the
sum due, calculated at so much per unit (for instance, number of books sold) does
not reach the minimum such deficiency may be carried forward, and deducted
from future royalties. Such deduction may not be made indiscriminately because
it is so limited that the recipient of the royalty at least receives the Minimum
Rent. Such an agreement is known as a right to recoup short workings. Where no
such right exists on the part of the user, the deduction is not allowed.
11
 Miscellaneous Accounts: Principles and Practice

The amount by which the Minimum Rent exceeds the royalties actually payable
II,!~'I
(calculated at the agreed rate per unit) is what is known as Short Working. Where
Short Workings arise through normal difficulties in starting production, the
'VUE:
producer may obtain the right to recoup Short Workings, at least, within three
YIIf::
years. In such cases he may only recoup for himself from the amount by which
the royalties exceed the Minimum Rent. The right may be unlimited sometimes. Ye

Illustration 2.1
A landlord gives AB LTD right to mine minerals on his land at royalty of NO.1 0 ~
per ton mined. In the first three years, production is 2000, 5000 and7000
respectively. Show the accounts of AB LTD. Yc

Suggested Solution
\~te
Rovalt Solution
N N
Year 1 A. Landlord 200 Year 1 Operating Account 200
Year 2 A. Landlord 500 Year 2 Operating Account 500
Year 3 A. Landlord 700 Year 3 Operating Account 700 .s:
A. Landlord Account
,re
y~
N N
Year 1 A. Cash 200 Year 1 Royalties 200
Year 2 A. Cash 500 Year 2 Royalties 500 ~
Year 3 A. Cash 700 Year 3 Royalties 700

If the landlord has a right to Minimum Rent, an account should be opened for the
Minimum Rent and for I short Workings. The accounting entries are:

Dr. Minimum Rent }

•
(CD

Cr. Landlord with the amount payable llL

Iii:;
1
111: 1
Dr. Royalties Account }With the actual royalties
1(lill
Cr. Minimum Rent Account earned

Dr. Short Working Account 1with the balance of I

f
Cr. Minimum Rent Account minimum rent 111

Illustration 2.2
If in illustration 2.1, the landlord has the right to muumum rent N550, the
accounts would be:

12
 Miscellaneous Accounts: Principles and Practice

Royalty Solution
W
Year 1 A. Minimum Rent Year 1 Operating Expenses 200
l: Year 2 A. Minimum Rent Year 2 Operating Expenses 500
Year 3 A. Landlord Year 3 Operating Expenses 700

(B) Minimum Rent

II:' W W
Year 1 A. Landlord 550 Year 1 Royalties 200
Short Workings 350
550 55Q
Year 2 A. Landlord 550 Year 2 Royalties 500
Short Workings 50
550

(C)

Year 1 Minimum
Year 2 A. Landlord

(D) A. Landlord
W
Year 1 Minimum 350
Year 2 Minimum 550
Year 3 Royalty 700

Illustration 2.3
Global Extractors Limited acquired the rights to remove gravel deposits from
Land owned by M. Ibanichuka. The agreement provided for:
(a) The payment of a royalty ofNOAO per ton of gravel removed
(b) A Minimum Rent ofN20,000 per annum
(c)' Recoupment rights to be extinguished at the end of year 3

During the first four years of the contract the following quantities of gravel were
removed:
Tones
Year 1 40,000
Year 2 48,000
Year 3 54,000
Year 4 56,000

13
 Miscellaneous Accounts: Principles and Practice

The company's accounting year ends on 31st December and payment to M.

Ibanichuka is made on 1st February following.
Prepare the appropriate accounts in the company's ledger for each of the four
years. Preliminary workings are necessary to provide the basic figures for
positioning the accounts.

Year Extraction Royalty Minimum

(Tones) payable Rent
Short
Working
Amount
Payable
AlW
Recoup
Alw:l
Written
Off
W W W W W W W
1. 40,000 16,000 20,000 4,000 20,000 - -
2. 48,000 19,000 20,000 800 20,000 - -
3. 54,000 21,600 20,000 1
20 ,000 1,600 3,200
4. 56,000 22,400 20,000 22,400 - -

Ro able Account
w
Year 1 Year 1
Dec. 32 M. Ibanichuka 16,000 II Dec. 31 Operating AlC 16,000
Year 2 Year 2
Dec. 31 M. Ibanichuka 19,200 II Dec. 31 Operating AlC 19,000
Year 3 Year 3
Dec. 31 M. Ibanichuka 21,600 II Dec. 31 Operating AlC 21,600
Year 4 Year 4
Dec. 32 M. Ibanichuka 22,400 ~ Dec. 31 Operating AlC 22,400

M. Ibanichuka Account
w W

I
Year 1 Year 1
Dec. 31 Balance c/d 20,000 Dec. 31 Royalties Payable
16,000
20.000 S/W recoverable
4,000
Year 2
Feb. 1 Bank 20,000 20.000
Dec. 31 Balance c/d Year 2
20,000 Jan. 1 Balance bid
20,000
40.000 Dec. 31 Royalties Payable
Year 3 19,200
Feb. 1 Bank Dec. 31 S/W recoverable

14
 Miscellaneous Accounts: Principles unci Fr:': .,

20,000
Dec. 31 S/W recoverable 1,600
Dec. 31 Balance cld 40jlliQ
20,000
Year 3 Balance bid
41,600 20,000
Year 4 Dec. 31 Royalties Payable
Feb. 1 Bank 21,600
20,000
Dec. 31 Balance cld 41,000
22,400 Year 4
Jan. 1 Balance bid
44,400 20,000
Dec. 31 Royalties Payable
22,400

44,400
Year 5
Jan. 1 Balance bid
22,400

Short Working Recoverable

Year 1 Year 1
Dec. 31 M. Ibanichuka Dec. 31 Balance c/d

Year 2 Year 2
Jan. 1 Balance bid 4,000 Dec. 31 Balance
Dec. 31 M. Ibanichuka 800
4,80Q
Year 3 Year 3
Jan. 1 Balance bid Dec. 31 M. Ibanichuka 1,600
Dec. 31 Profit and Loss 3,200
4,800 4,800
Summary of General Principles
Before we discuss sub-Royalties, the general principles already dealt with are
summarized below:
1. There may be no right at all to recoup short workings.
2. Where the right to recoup short working exists, it may be subject to a
limitation as to the period within which the right may be exercised, for
instance:

15
 Miscellaneous Accounts: Principles and Practice

(a) A certain number of years from the commencement of the lease or

agreement
(b) A certain number of years from the end of the year in which the
deficiency occurs.
Therefore, particular attention should be paid to the dates and terms of the
lease.
3. Unless some covenant to the contrary is contained in the lease, the balance
of short workings inclusive of the amount arising in the last year of the
lease, is irrecoverable.
4. The landlord, in circumstances (1), will always be entitled to the amount of
royalty or Minimum Rent, whichever is the greater.
5. Once the Short Workings balance is eliminated, the landlord will receive in
one year (until another deficient year arises) the full royalty, subject to the
deduction ofIncome Tax where necessary.
6. Where the time limit for recouping short workings has expired, the
treatment of royalties for subsequent years is exactly as if no right to recoup
existed, and the irrecoverable short workings are at once written-off. .;
7. The Short Workings Account must never have a credit unless there is some
exceptional agreement, e.g. to anticipate Short Workings in future years.
Sub-Royalties
It frequently happens that a Concern obtains a lease of land on which to work a
mine or quarry, the terms being the usual royalty, merging in a Minimum Rent
with a right of Recoupment of Short Workings, coupled with the right to sublet
part of the land to a sub-lessee.
The entries in the lessee's books in respect of Royalty Receivable are reverse to
those relating to Royalty Payable. Should the sub-letting be a higher rate than that
payable by the lessee to the landlord, such excess is a profit to be credited to
profit and loss account; otherwise the amount receivable from the sub-lessee is
credited to the Production Account against the Royalty Payable by the lessee,
since the later accounts to his landlord for the royalty upon the whole output.
Usually separate accounts for the Royalty Receivable and payable are opened,
although one account only may be and employed; but in both instance the Net
Royalty payable will be transferred to the debit of Production Account.
Illustration 2.4
Hazel P1c obtains a lease from the landlord to work a mine. Terms are for a
.royalty of WI per ton with a minimum rent of WlO,OOO per annum. Short
Workings may be recovered over the full term of the lease. Hazel P1c sublets part
to Ifeco Limited, terms being a royalty of WI per ton with a minimum rent of
N3,000 a year. Short workings can be recovered over the whole period of the
sub-lease. Assume that all payments are made on the last day of each year. The
tons of output are as follows:

16

._~---,,-_._---
 Miscellaneous Accounts: Principles au.: r':...:':..:,.

Year Hazel PIc Ifeco Ltd. Total Production

1 7,200 1,000 8,200
2 8,000 1,400 9,400
3 12,000 3,000 15,000
4 6,000 3,200 9,200
5 9,000 4,000 13,000
Required: prepare the relevant account in the books of Hazel PIc.
(a) Ro alties Pa able Account

Year 1 Year 1
Dec. 31 Landlord 8,200 Dec. 31 Royalties
Receivable 1,000
Dec. 31 Operating Account 7,200
8,200

Year 2 Year 2
Dec. 31Landlord 9,400 Dec. 31 Royalties
Receivable 1,400
Dec. 31 Operating Account 8,000
9.400

Year 3 Year 3
Dec. 31Landlord 15,000 Dec. 31 Royalties
Receivable 3,000
Dec. 31 Operating Account 12,000
15,000 15,000

Year 4 Year 4
Dec. 31 Landlord 9,200 Dec. 31 Royalties
Receivable 3,200
Dec.31 Operating Account 60,000
9.200

Year 5 Year 5
Dec. 31 Landlord 13,000 Dec. 31 Royalties
Receivable 4,000
Dec. 31 Operating Account 9,000
13,000 13,000

17
 Miscellaneous Accounts: Principles and Practice

(b) Royalties Payable Account

N N
Year 1 Year 1
Dec. 31 Royalties Payable 1.000
Dec. 31 Ifeeo Ltd. 1,000
Year 2 Year 2
Dec. 31 Royalties Payable IdO O Dec. 31 Ifeco Ltd. ~
Year 3 Year 3
Dec. 31 Royalties Payable 3,000 Dec. 3 l Ifeco Ltd. 3,000
Year 4 Year 4
Dec. 31 Royalties Payable UOO Dec. 31 Ifeco Ltd. ,:L200
Year 5 Year 5
Dec. 31 Royalties Payable 4.,OOQ Dec. 31 Ifeco Ltd. 4,000

Landlord Account
N N
Year 1 Year 1
Dec. 31 Bank 10,000 Dec. 31 Royalties
Payable 8,200
S/W recoverable 1,800
10,000 ~OOO

Year 2 Year 2
Dec. 31Bank 10,000 Dec. 31 Royalties
Payable 9,400
S/W recoverable 600
10,000 1MQQ

Year 3 Year 3
Dec. 31Short Working 2,400 Dec. 31 Royalties
Bank 12,600 Payable 15,000
15,000 ~OOO
Year 4 Year 4
Dec. 31Bank 10,000 Dec. 31 Royalties
Payment 9,200
S/W recoverable 800
- ­
10,000 lQ.OOO
Year 5 Year 5
Dec. 31 Short Workings 800 Dec. 31 Royalties
Dec. 31 Bank 12,200 Payable 13,000
ll,ODO
13~OOO

18

It'
 Miscellaneous Accounts: Principles and Pr :«: .,

Short Working Recoverable Account

--~------ -----------~~--
N
Year 1 Year 3
Dec. 31Landlord 1,800 Dec. 31Landlord 2,400
Year 2
Dec. 31 Landlord
2.400
=
Year 4 Year 5
Dec. 3 1Landlord 300 Dec. 31 Landlord

Ifeco's Account
N
Year 1 Year 1
Dec. 31 Royalties Dec. 31Bank 3,000
Receivable 1,000
Dec. 31 Short Working
Allowable 2,000
3,00Q
Year 2 Year 2
Dec. 31 Royalties Dec.31Bank 3,000
Receivable 1,400
Dec. 31 Short Working
Allowable 1,600
3,000
Year 3 Year 3
Dec. 31 Royalties Dec. 31Bank 3,000
Receivable 3,000 3,000
Year 4
Dec. 31 Royalties Year 4
Receivable 3,200 Dec. 31 S/W Allowable 200
3.200 Bank 3,000
Year 5 3,200
Dec. 31 Royalties Year 5
Receivable 4,000 Dec. 31 S/W Allowable 1,000
Bank 3,000
~OO 4,000

19
 Miscellaneous Accounts: Principles and Practice

(g) Short Working Recoverable Account

W W
Year 4 Year 1
Dec. 31 Ifeco Ltd 200 Dec. 31Ifeco Ltd 2,000
Year 5 Year 2
Dec. 31 Ifeco Ltd 1,000 Dec. 31 Ifeco Ltd 1,600 A
Balance c/d 2,400 .;;

3,600 3,600 'f.

il
(h) o I
~,

W
Year 1 Royalties
Year 2 Royalties
Year 3 Royalties
Year 4 Royalties
Year 5 Royalties

Revision Questions
1. Mr. K. Ekegwu on 1st January 1992 leases a machine to Mr. Ijeh Efe on
terms that the charge for royalty be WO.Ol per 1000 stitches with a
minimum monthly payment of WlO with right to recoup short workings
over the three months immediately succeeding the month of the shortage.

From the special counters employed, the numbers of stitches for each month are:
Month - Stitches
January - 500,000
February - 800,000
March - 1,000,000
April - 1,200,000 t

May - 1,300,000
June - 1,000,000
July - 1,500,000
Show the entries required in the books ofMr. Ijeh Efe.
.s

2. Mr. Elechi obtains a lease from Mr. Cottrell to work a mine, the terms being
a royalty of NO.05 per ton merging into a Minimum Rent of N100 per
annum with a right to recoup Short Workings over the whole period of the
lease. Mr. Elechi sublets part of the property to Mr. Isirima, the terms being
a royalty of NO.05 per ton merging in a Minimum Rent of W48 per annum,
recoupment being available over the whole period of the Sub-Lease. The
amount of ore extracted is as follows:

20
 Miscellaneous Accounts: Principles and Practice

Year Mr. E1echi Mr. Isirima Tota]

(Tons) (Tons) (Tons)
] 1,100 400 1,500
2 1,160 540 1,700
If!
3 1,300 700 2,000
4 1,400 900 2,300
1'I 5 1,800 1,200 3,000
6 800 1,200 2,000

Required: prepare the relevant account in the books ofMr. E1echi.

Smoker, who had patented a tobacco filter, granted to Urnor and Co. a licence for
seven years to manufacture and sell the filter on the following tenus:

Umor and Co. to pay a royalty of W] for every 100 filters sold with a minimum
payment of WI000 per annum. Calculations to be made annually as at 31st
December and payment on 31st January.

If for any year, the royalties calculated on filters sold amount to less than WI000,
Umor and Co. may set off the deficiency against royalties' payable excess of that
sum in the next two years.

The numbers of filters sold were as follows:

Year to 31 December 1979 60,000

Year to 3 1 December 1980 80,000
Year to 31 December 1981 120,000
Year to 31 December 1982 140,000

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

21
L.C.OBARA(Ph.D)
 .
I
(About the Author
.
-+----------~----------
t
I
. ----­ -
Lcwyer t. Obara holds a Doctor of Phia.c-. '.;1
in Accoontancy from the Rivers State'~
Sdenee~nd TeCl,nology, Nkpotu, Port I'''''''

He llQS been,,;tt!~iJecturer in the

.Accountancy, Fqcplty of Management Science, Ri
State Universitt-;( of Science and Technology Port
Harcourt since i 990 and He is currently the Head of
Department.

He is atso the Ch~ef Consultant of Global Konsult, Port

Harcourt.

He has authored/co-authored books as well as

contributed to several articles in academic journals and
books of reading Accountancy and Finance.

i
IAbD~ fGhe Boa~

, -~--------~----------------_.
I
I
This text is an attempt to present an up-to-date and
integrated "lew.of·th~ Principles and Practice of
Misc~t~QJi.~oosAccounts. The concepts and
te<thp!c9U~~S involNed in these specialized areas are
......' ;~Jj~~~11UQlly 'presented and comprehensively
"~. In~~rbted to enhance the understanding of the
• ..,0., .., SUb,ject~"

ISBN: 978·2009·36·21 02.10.11

. 9789782009364 II
II 21

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