Page 250 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 10: Underwriting of Shares

Notes
Did u know? This is an additional commission which is paid by the company to the
underwriter for providing the services of sub-underwriters. This is calculated on the
entire underwritten amount of shares or debentures at a fixed percentage. On account of
being the income of the underwriter, this is credited to the underwriting account. When
the maximum rate of underwriting commission is decided, this commission also includes
in underwriting commission as per Section 76 of Companies Act.
Illustration 11 (When Only One Account is Maintained by the Underwriter)
A underwrites an issue of 10,000 shares of 10 each in consideration of a commission of 4%
payable in cash, the public having subscribed for 9,500 shares only. A, under the terms of his
contract, has to take up the remaining 500 shares. His expenses amount to 100 when he closes
his accounts for the year no shares were sold. The market value of the shares was 6 per share.
A few days after closing his above account for the year, the above mentioned underwriter sold
200 shares at the rate of 6 per share. The market value of the remaining shares at the close of the
year was 5 per share. In the next year the underwriter sells all the remaining shares at the rate
of 7 per share. Show the underwriting account for all the three years in the books of A.
Solution:
In the books of A Underwriting Account

Date Particulars Shares Amount Date Particulars Shares Amoun
t
I Year To Bank (Exps.) A/c – 100 I Year By Bank – 4,000
(Underwriting
commission)
To Bank Account 500 5,000 By Balance c/d 500 1,100
(shares taken up)
500 5,100 500 5100
II To Balance b/d 500 1,100 II By Bank Account 200 1,200
Year Year (Sale of 200 @ 6
per share)
To Profit & Loss A/c – 100 By Balance c/d 300 –
(profit on sale of
share)
500 1,200 500 1,200
III To Balance b/d 300 – III By Bank Account 300 2,100
Year Year (sale of 300 share
@ 7 per share)
To profit and Loss – 2,100
A/c (Profit on sale of
300 Shares)
300 2,100 300 2,100

Illustration 12 (Underwriting with Sub-Underwriting)
A Ltd. issued 4,000 shares of 10 each and entered into an underwriting agreement with B who
agreed to underwrite the whole issue at a commission of 4% and entered into sub-underwriting
agreement with C for 25% of the issue at a commission of 3%. The public applied only for 75%
of the issue, hence the balance was taken up by the underwriters. B sold the shares held by him
@ 8 per share. Find out profit or loss on underwriting from B’s point of view.

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