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Accounting for Companies-I
Notes Illustration 2 (When the Entire Issue is Underwritten by More Than One Underwriter)
Sudhir Limited was incorporated on 1st January, 2006 and issued a prospectus inviting
applications for 20,000 equity shares of 10 each. The whole issue was underwritten by ‘A’, ‘B’
and ‘C’ as follows:
‘A’ 10,000 shares, ‘B’ 6,000 share, ‘C’ 4,000 shares. Applications were received for 16,000 shares of
which marked applications were as follows:
‘A’ 8,000 shares, ‘B’ 2,850 shares, ‘C’ 4,150 shares. Find out the liability of individual underwriters
and pass the journal entries in the books of Sudhir Limited.
Solution:
Statement of Underwriter’s Liability in Shares
Particulars Underwriters Total
A B C
Gross Liability as per agreement. 10,000 6,000 4,000 20,000
Less: Marked Applications 8,000 2,850 4,150 15,000
Resultant Liability 2,000 3,150 –150 5,000
Less: Credit of unmarked applications in the ratio
of gross liability (i.e., 5:3:2) 500 300 –200 1,000
Resultant Liability 1,500 2,850 –350 4,000
Less: Surplus of ‘C’ distributed between ‘A’, ‘B’ in the ratio
5:3 (gross liability ratio) 219 131 350 —
Net Liability in shares 1,281 2,719 Nil 4,000
Alternatively, the second method can be adopted.
Statement of Underwriter’s Liability in Shares
Particulars Underwriters Total
A B C
Gross Liability 10,000 6,000 4,000 20,000
Less: Marked Applications 8,000 2,850 4,150 15,000
Resultant Liability 2,000 3,150 –150 5000
Less: Surplus of C distributed in gross
liability ratio (5:3) 94 56 150 –
Gross Liability as reduced by marked applications 1,906 3,094 Nil 5,000
Less: Credit for unmarked applications
Distributed in the ratio 1906 : 3094 381 619 – 1,000
Net Liability 1,525 2,475 – 4,000
Journal Entries (Based on First Method)
Date Particulars L.F.
Bank Account Dr. 1,60,000
To Equity Share Capital Account 1,60,000
(Being allotment of 16,000 shares of 10 each to the public)
‘A’s Account Dr. 12,810
‘B’s Account Dr. 27,190
To Equity Share Capital Account 40,000
(Being allotment of 4,000 shares to underwriters as per agreement).
Underwriting Commission Account Dr. 10,000
To A’s account 5,000
To B’s account 3,000
To C’s account 2,000
(Being commission due to underwriter @ 5% on 2,00,000)
Bank Account Dr. 32,000
Contd...
To A’s Account 7,810
To B’s Account 24,190
(Being receipt of the balance from A & B)
C’s Account Dr. 2,000
228 LOVELY PROFESSIONAL UNIVERSITY
To Bank Account 2,000
(Being payment of commission to C)