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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)
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