When a royalty agreement includes minimum rent, the lessee pays the higher of either the actual royalty or the minimum rent. If actual royalty is less than minimum rent, the difference is recorded as short workings, which may be recoverable in future periods when surplus exists.

Worked Example: Minimum Rent with Fixed Recoupment Period

Situation: Mkwakwani Drilling Group (MDG) Ltd. granted a mining lease to Pangani Ltd. with:

• Royalty: TZS 30,000 per tonne of ore mined
• Minimum rent: TZS 10,000,000 per year
• Recoupment right: First four years only

Explanation:

• Years 2020 and 2021: Actual royalty is less than minimum rent; short workings of TZS 4,000,000 and TZS 1,000,000 are created.
• Year 2022: Surplus of TZS 2,000,000 is used to recoup short workings from previous years.
• Year 2023: Short workings of TZS 1,000,000 plus unrecouped balance (TZS 4,000,000 − TZS 2,000,000 = TZS 2,000,000) are transferred to Statement of Profit or Loss as irrecoverable.
• Year 2024: Actual royalty exceeds minimum rent; excess is paid.

When there is no minimum rent clause, the lessee pays only the actual royalty based on production or sales. No short workings or recoupment issues arise.

Worked Example: No Minimum Rent

Situation: Pasua Company leased land for mineral extraction from Loliondo Company Ltd. at TZS 50,000 per kg. No minimum rent is required.

The lessee simply pays the actual royalty each year based on output. No minimum rent, short workings, or recoupment entries are required.

The lessor maintains three key accounts:

1. Royalty Receivable Account — records royalties earned
2. Lessee Account — records amounts due from and received from lessee
3. Short Workings Allowable Account — records excess minimum rent over actual royalty (liability)

Journal Entries — Lessor

The lessee maintains:

1. Royalty Payable Account — records royalty expense
2. Lessor Account — records amounts owed to and paid to lessor
3. Short Workings Recoverable Account — records short workings carried forward (asset)

Journal Entries — Lessee

• Fixed right: Short workings can only be recouped within a fixed period (e.g., first four years of the lease). Any unrecouped balance after this period is written off.
• Floating right: Short workings of any year can be recouped in the following years (e.g., within two years after payment). Each year's short workings has its own expiry date.

• Royalty payments are based on output or sales; minimum rent guarantees the lessor a minimum payment.
• When actual royalty < minimum rent, short workings arise and may be recouped from future surplus.
• If recoupment period expires, irrecoverable short workings transfer to Statement of P/L.
• When no minimum rent exists, only actual royalties are paid and recorded.
• Both lessor and lessee must maintain corresponding ledger accounts to track transactions accurately.

In Tanzania, a local mining company like a tanzanite or gold mining operation in Merelani Hills or Geita would use these royalty accounting procedures when negotiating extraction rights with the government or private landowners. For example, a small-scale gold miner in Geita paying royalties to a landowner at TZS 50,000 per gram extracted with a minimum rent clause would record short workings in low-production months and recoup them during high-production months, ensuring accurate financial statements for tax purposes and business planning.