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Accounting for Companies-I

Notes is fully subscribed or oversubscribed, the underwriter will be free from his liability.
But he is entitled to receive his commission on the total issue price of shares or
debentures. Here, the issue price means the nominal value of shares or debentures
in case the issue is at par. In case of discount, issue price means nominal value of
shares or debentures minus discount allowed and in case of premium issue, price
will be nominal value + premium on issue of shares or debentures.

10.7 Accounting Treatment

Journal entries in the books of the insured company:
(i) When underwriting commission is due to underwriters-
Underwriting Commission Account Dr.
To Underwriters Account.
(ii) When underwriting commission is paid to underwriter in cash, debentures or shares-

Underwriters Account Dr.
To Bank Account
To Share Capital Account

To Debentures Account.
(iii) When the entire issue of shares or debentures is fully subscribed and liability for shortfall
in public subscription is taken by underwriters-

Underwriters Account Dr.
To Shares Capital Account.
To Debentures Account.
(iv) When the amount is received for shares or debentures taken from underwriter-
Bank Account Dr.

To Underwriters Account .
(v) When the underwriting commission is written off from the profit or shares premium
account-

Profit and Loss Account Dr.
Share Premium Account Dr.
To Underwriting Commission Account.

Illustration 1 (When the Entire Issue is Underwritten by Only One Underwriter)
Sholapur Limited was formed with a capital of 1,000,000 divided into 10,000 equity shares of
100 each. All these shares were offered for subscription by prospectus to the public at par. The
whole issue has been underwritten by Shabnam & Co. for a commission of 4%. The company
received the applications for only 9,500 shares. All the applications were accepted by the company
and the balance were taken up by the underwriter. You are required to pass the journal entries
to record the above transactions in the books of Sholapur Limited and prepare the balance sheet
at this stage, assuming that all amounts due have been received.

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