Unit - 5 Royalty and Insurance Claims

What is royalty? Distinction between rent and royalty.

➽ The term ‘Royalty’ expresses an amount either payable or receivable by one person in return for some special
right or privilege conceded to him by another person.
This right may be any of the following types:
1. Mining Royalty: Right to extract some mineral such as oil, coal, stone etc from land.
2. Patent Royalty: Right to use certain patterns for the manufacture of articles for sale.
3. Copyright Royalty: Right to publish or sell books under a copyright.

The differences between rent and royalty are given down below in the following table:
Point Rent Royalty
Nature of the Assets involved In the case of rent, the nature of the In the case of royalty, the nature of
asset involved is tangible such as the asset involved may be tangible or
land, buildings, machinery etc. intangible such as patent rights,
copyrights, operating leases, etc

Fixed / Variable The amount of rent generally The amount of royalty payable
remains fixed for a particular period. varies with the variation in
production or sales.

Maximum rent The concept of ‘minimum rent’ is not Agreement for payment of royalty
applicable in the case of rent. generally contains a clause for
payment of minimum rent.
Explain the following terms:
(i) Minimum rent
➽ The minimum amount which is parable periodically by the lessee to the lessor is known as ‘Minimum Rent’
or ‘Dead Rent’

(ii) Short-working
➽ The excess of minimum rent over actual royalty is known as short-working. the question of short-working
arises only when the lease agreement provides for the payment of minimum rent and short-working occurs only when
the actual royalty is less than the minimum rent.

(iii) Recoupment of short-working

➽ Recoupment of short-working refers to the right of the lessee to recover the amount of short-working paid in
earlier years by setting it off against the excess or surplus royalties earned over the minimum rent in future years. This
right is typically granted by the lessor to the lessee for a specific number of years as stated in the royalty agreement.

(iii) Lapse of short-working

➽ Lapse of short-working occurs when the right to recoup short-working is lost after a specified period, as
defined in the royalty agreement. If the short-working is not recouped within the period mentioned in the agreement, it
lapses, meaning the lessee can no longer recover or adjust the short-working in future years. This typically happens if
the lessee does not earn enough surplus royalties in the agreed period to offset the shortworking.

(v) Impact of Strike and Lock Out

➽ The impacts of Strike and Lock Out and royalty account are as follows:
1. Actual royalty earned considered as Minimum Rent: In the event of a strike or lock out in a particular year,
if the Minimum Rent cannot be raised, the actual royalty earned will discharge all rental obligations i.e. it will
be taken to the Minimum Rent of that year.
2. Reduction of Minimum Rent proportionately: In the event of strike or lockout in a particular year, if the
Minimum Rent could not be raised, the Minimum Rent will be reduce proportionately having regard to the
length of stoppage.

What is an Insurance Claim? What are its different types?

➽ An insurance claim is a formal request by the insured to the insurance provider for reimbursement against
losses covered under the insurance policy, consequent on the happening of the event for which the policy is taken.
Here are the different types of insurance claims:

1. Health Insurance Claim: Filed for medical expenses incurred due to illnesses, injuries, or medical treatments.
2. Auto Insurance Claim: Filed for damages to or loss of a vehicle due to accidents, theft, or other incidents.
3. Homeowners Insurance Claim: Filed for damages or losses related to a home, including natural disasters,
theft, or accidents.
4. Life Insurance Claim: Filed by beneficiaries to receive the death benefit upon the death of the insured.
5. Travel Insurance Claim: Filed for losses incurred during travel, such as trip cancellations, medical emergencies,
or lost luggage.
6. Disability Insurance Claim: Filed for financial support when the policyholder is unable to work due to a
disability.
7. Liability Insurance Claim: Filed for protection against legal claims of injury or damage caused to others.
8. Business Insurance Claim: Filed by businesses for losses related to property damage, liability, or business
interruption.

Explain the terms:

(i) Sum insured
➽ Whenever any asset of a business entity is insured, it is insured for a particular amount. The amount for
which the asset is insured is called the sum insured or the amount insured. This amount is stated in the ‘Policy’ issued
to the insured

(ii) Amount of indemnity

➽ Amount of indemnity is the amount that the insurance company is liable to pay to the insured on account of
loss of the insured property. The amount of indemnity cannot exceed the amount insured. It should be noted that
general insurance policies are essentially contracts of indemnity.

(iii) Period of indemnity

➽ The period of indemnity or indemnity period is the period during which the normal activities of a business are
likely to remain dislocated in consequence of the insured pedal such as fire. The amount of the premium to be charged
by an insured company depends on the period for which the indemnity is required.
(iv) Stock salvaged
➽ Whenever any abnormal loss occurs, every effort is made by the insured to minimise the loss. the insured puts
all his effort into saving the stock and other properties from being destroyed. The value of the stock from being
damaged is termed as ‘Stock Salvaged’
Give accounting entries in the books of the insured.
➽ For recording transactions involving various losses suffered, claims admitted by the insurance company and
receipt of payment of a claim, the following entries are passed by the insured in its books of account:
1. For Stock damaged or destroyed:
Stock Destroyed Account Dr.(Actual loss)
To Purchase Account/Trading Account
2. For claim admitted by the Insurance Company for stock destroyed:
Insurance Company Account Dr [Total amount of claim admitted]
To Stock Destroyed Account [Total amount of claim admitted]
3. For claims admitted by the Insurance Company for loss of profit:
Insurance Company Account Dr [Total amount of claim admitted]
To Profit And Loss Account/ Statement Of Profit And Loss
[Total amount of claim admitted]
4. For the amount of stock destroyed but not admitted by the Insurance Company as claim (Being the
loss):
Profit and Loss Account/Statement of Profit and Loss Dr
[With the amount of claim NOT admitted]
To stock destroyed account [With the amount of claim NOT admitted]
5. For any asset such as furniture, building, plant damaged or destroyed:
Furniture/Building/Plant Destroyed Account Dr[Actual loss]
To Furniture/ Building/Plant Account
6. For claim admitted by the Insurance Company for loss of any assets such as furniture, building, plant
destroyed or damaged
Insurance Company Account Dr. [With the amount of claim admitted]
To Furniture/Building/Plant Destroyed Account
7. For the amount of Asset destroyed but not admitted by the Insurance Company as claim (Being the
loss):
Profit and Loss Account/Statement of Profit and Loss Dr
[With the amount of claim NOT admitted]
To Furniture/Building/Plant Destroyed Account
8. When cash is received from insurance company for various claims:
Bank account Dr
 To insurance company account
9. For Loss incurred for assets such as furniture, building, plant damaged or destroyed (Difference
between the book value of asset and claim admitted)
Profit and Loss Account/ Statement of Profit and Loss Dr
To Furniture/Building/Plant Account