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Underwriting help

Vijeth Kumar C (CA Final) (1615 Points)

06 April 2012

S is a underwriter, who has agreed to underwrite the issue of 25,000 shares f Rs. 10 each of M ltd. The company agreed to give commission of 10%. S insisted 75% of commission in fully paid shares & balance in cash. S had also agreed to purchase 3,000 shares as firm underwriting. As company didn't get sufficient demand from public, S had to take up 40% of total issued shares.

Please suggest how how to solve.

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2 Replies

Harshal Fifadra (Chartered Accountant) (1489 Points)
Replied 07 April 2012

Issue Value = 25,000*10 = 2,50,000

Commission = 2,50,000*10/100 = 25,000

75 % in terms of shares = 25,000 * 75/100 = 18,750 , Cash Payment = 25,000 - 18,750 = 6,250

However the maximum commission payable is 5 % i.e 25,000*5/100 = 1,250

Therefore commission in terms of shares = 1,250 * 75/100 = 937.50 , Cash Payment = 312.50

Total subscripttion by the underwriter = 25,000*40/100 + 3,000 = 10,000 + 3,000 = 13,000 shares

In the books of company, you will pass following journal entries.

1. When company gets money from public for selling shares under the contract of underwriting.

Bank account Dr.
Share capital Account Cr.

2. When underwriter takes the liability of unsold shares

Underwriter's account Dr.
Share Capital Account Cr.

3. When underwriting commission will due

Underwriting Commission Account Dr.
Underwriter's Account Cr.

4. When Underwriter deduct his commission and send net amount of takeover shares

Bank Account Dr.
Underwriter Account ( Total receivable amount on takeover shares by underwriter - Underwriter's commission) Cr.

Ok . . .