Accounting Treatment relating to Underwriting of Shares or Debentures :
(a) When the shares or debentures are allotted to the underwriters in respect of their liability:
Underwriters A/c . Dr with the value of the shares or debentures taken
To Share Capital A/c up by the underwriters
To Debentures A/c
(b) When commission becomes payable to the underwriters:
Underwriters Commission A/c Dr. with the amount of commission due on the total issue price of the shares under-written
To Underwriters A/c
(c) When the net amount due from the underwriters on the shares or debentures taken up by them is received:
Bank Dr. with the net amount due
To Underwriters A/c
Note: Underwriting commission is not generally paid in cash. Instead the same is adjusted against the money due on shares or debentures taken up by the underwriters and only the net amount (i.e., total amount due on shares or debentures taken up by the underwriters minus the underwriting commission) is received from the underwriters.
Illustration 1
Sunflow Ltd. issued 50,000 equity shares. The whole of the issue was underwritten as follows:
Red 40%; White 30%; Blue 30%
Applications for 40,000 shares were received in all, out of which applications for 10,000 shares had the stamp of
Red; those for 5,000 shares that of White and those for 10,000 shares that of Blue. The remaining applications
for 15,000 shares did not bear any stamp.
Determine the liability of the underwriters.
Solution:
| Red (40%) Shares | White (30%) Shares |
Blue(30%) Shares
|
|
| Gross liability in the agreed ratio of 40 : 30 : 30 | 20,000 | 15,000 | 15,000 |
| Less: Marked applications | 10,000 | 5,000 | 10,000 |
| Balance left | 10,000 | 10,000 | 5,000 |
| Less: Unmarked applications in the ratio of gross liability, i.e.,
40 : 30 : 30 |
6,000 | 4,500 | 4,500 |
| Net liability | 4,000 | 5,500 | 500 |
Illustration 2
Monlit Ltd., issued 50,000 equity, shares of which only 60% was underwritten by Green. Applications for 45,000 shares were received in all out of which application for 26,000 were marked.
Determine the liability of Green.
Solution:
Gross liability of Green being 60% of 50,000 shares, i.e., 60/100 x 50,000 = 30,000 shares
Less: Marked applications = 26,000 shares
Net liability of Green = 4,000 shares
Notes:
(1) If the marked applications were for 30,000 shares or more, Green would have had no liability at all.
(2) If the applications received by the company were for all the 50,000 shares, Green would have no liability at all even though the marked applications were for 26,000 shares.
(3) If the applications received by the company were for 48,000 shares, Green’s liability would have been restricted to (50,000 – 48,000) = 2,000 shares, even though the marked applications were for 26,000 shares.
Sometimes, it may so happen that the information as to the marked applications and unmarked applications may not be given in the problem. In such a case, it has to be assumed that out of the total applications received by the company, the number of applications proportionate to that part of the issue underwritten have been received through the underwriters.
Illustration 3
Goods Earths Ltd., issued 30,000 6% Debentures of ` 100 each. 60% of the issue was underwritten by Black.
Applications for 28,000 debentures were by the company.
Debentures the liability of Black.
Solution:
Gross liability of Black being 60% of 30,000
debentures i.e., 60/100 x 30,000 = 18,000 debentures
Less: Marked applications assumed 60% of
28,000 i.e., 60/100 x 28,000 = 16,800 debentures
Net liability of Black = 1,200 debentures
Alternatively, Black’s liability can be determined in the following way:
Number of debentures not subscribed for by the public = (30,000 – 28,000)
= 2,000 debentures
Black’s liability = 60% of 2,000 debentures
= 60/100 x 2,000 = 1,200 debentures
Illustration 4
Satellite Ltd., issued 12% 10,000 Preference Shares of ` 10 each. The issue was underwritten as follows:
Apple 30%, Mango 30%, Orange 20%.
Application for 8,000 shares were received by the company in all. Determine the liability of the respective underwriters.
| Apple (30%)
Shares |
Mango (30%)
Shares |
Orange(20%)
Shares |
|
| Gross liability in the agreed ratio of 30 : 30 : 20 | 3,000 | 3,000 | 2,000 |
| Less: Marked application, i.e., 8,000 application in the ratio of
3/10 : 3/20 : 2/10 |
2,400 | 2,400 | 1,600 |
| Net liability | 600 | 600 | 400 |
Alternatively, the liability of the respective underwriters can also be determined in the following manner:
Shares issued 10,000
Less: Applications received 8,000
Unsubscribed shares 2,000
Apple’s liability = 30% of 2,000 = 600 shares
Mango’s liability = 30% of 2,000 = 600 shares
Orange’s liability = 20% of 2,000 = 400 shares
Total liability of Apple, Mango and Orange
= 600 + 600 + 400 = 1,600 shares.
which represent 80% of the total issue underwritten. The balance (2,000 – 1,600) = 400 shares representing
20% of the issue not underwritten will remain as unissued.
Illustration 5
Emess Ltd. issued 40,000 shares which were underwritten as:
P: 24,000 shares Q: 10,000 shares and R: 6,000 shares. The underwriters made applications for firm underwriting as under:
P: 3,200 shares; Q: 1,200 shares; and R: 4,000 shares. The total subscriptions excluding firm underwriting (including marked applications) were 20,000 shares.
The marked applications were – P: 4,000 shares; Q: 8,000 shares; and R: 2,000 shares.
Prepare a statement showing the net liability of underwriters.
Solution:
Statement of Underwriters’ Liability
(Firm underwriting shares are treated as unmarked applications)
| P | Q | R | Total | |
| Gross Liability
Less: Marked applications 14,000 |
24,000
4,000 |
10,000
8,000 |
6,000
2,000 |
40,000
14,000 |
| Balance
Less: Unmarked applications in the ratio of gross liability (12:5:3) |
20,000
8,640 |
2,000
3,600 |
4,000
2,160 |
26,000
14,400 |
| Balance | 11,360 | (–1,600) | 1,840 | 11,600 |
| Credit of Q’s over subscription to
P & R in the ratio of 12:3 |
(1,280) | +1,600 | (320) | – |
| Net Liability | 10,080 | – | 1,520 | 11,600 |
| Add: Firm underwriting | 3,200 | 1,200 | 4,000 | 8,400 |
| Total Liability | 13,280 | 1,200 | 5,520 | 20,000 |
Alternate Answer
Statement of Underwriters’ Liability
(Firm underwriting shares are treated as marked applications)
| P | Q | R | Total | |
| Gross Liability
Less: Unmarked applications 6,000 in ratio of gross liability (12:5:3) |
24,000 3,600 |
10,000
1,500 |
6,000
900 |
40,000 6,000 |
| Balance
Less: Marked application plus shares underwritten firm |
20,400 7,200 |
8,500
9,200 |
5,100
6,000 |
34,000
22,400 |
| Balance |
13,200 |
– 700 | – 900 |
11,600 |
| Credit for Q’s and R’s oversubscription |
– 1,600 |
+700 | +900 |
__ _-_____ |
| Net Liability |
11,600 |
– | – |
11,600 |
| Add: Firm Underwriting |
3,200 |
1,200 | 4,000 |
8,400 |
| Total Liability |
14,800 |
1,200 | 4,000 |
20,000 |
Illustration 6
Sam Limited invited applications from public for 1,00,000 equity shares of 10 each at a premium of ` 5 per share. The entire issue was underwritten by the underwriters A, B, C and D to the extent of 30%, 30%, 20% and 20% respectively with the provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000 shares respectively.
The underwriters were entitled to the maximum commission permitted by law.
The company received applications for 70,000 shares from public out of which applications for 19,000, 10,000, 21,000 and 8,000 shares were marked in favour of A, B, C and D respectively.
Calculate the liability of each one of the underwriters. Also ascertain the underwriting commission @ 2.5% payable to the different underwriters.
Solution:
Liability of Underwriters (No. of shares)
| Total | A | B | C | D | |
| Gross Liability
Less: Unmarked applications
|
1,00,000
12,000 |
30,000
3,600 |
30,000
3,600 |
20,000
2,400 |
20,000
2,400 |
| Balance
Less: Marked application
|
88,000
58,000 |
26,400
19,000 |
26,400
10,000 |
17,600
21,000 |
17,600
8,000 |
| Balance
Less: Firm Underwriting |
30,000
7,000 |
7,400
3,000 |
16,400
2,000 |
-3,400
1,000 |
9,600
1,000 |
| Balance x
Adjustment |
23,000
___-___ |
4,400
– 1,650 |
14,400
– 1,650 |
– 4,400
+4,400 |
8,600
-1,100 |
| Net Liability 7,500 | 23,000 | 2,750 | 12,750 | – | 7,500 |
| Total Liability including firm underwriting | 30,000 | 5,750 | 14,750 | 1,000 | 8,500 |
Note: The above answer is arrived at by treating ‘firm underwriting shares’ on par with marked applications.
Alternatively, the ‘firm underwriting shares’ may be treated on par with un-marked applications. Then, the
answer will be as follows:
Shares
Applications received including firm underwriting 77,000 (70,000 + 7,000)
Less: Marked Applications 58.000
Un-marked Applications 19.000
Liabilities of Underwriters (No. of shares)
| Total | A | B | C | D | |
| Gross Liability | 1,00,000 | 30,000 | 30,000 | 20,000 | 20,000 |
| Less: Unmarked | |||||
| Applications | 19.000 | 5.700 | 5.700 | 3.800 | 3.800 |
| Balance | 81,000 | 24,300 | 24,300 | 16,200 | 16,200 |
| Less: Marked | |||||
| Applications | 58.000 | 19.000 | 10.000 | 21.000 | 8.000 |
| Balance | 23,000 | 5,300 | 14,300 | – 4,800 | 8,200 |
| Adjustment | – 1.800 _ | – 1.800 | +4.800 | 1.200 | |
| Net Liability | 23,000 | 3,500 | 12,500 | – | 7,000 |
| Add: Firm | |||||
| Underwriting | 7.000 | 3.000 | 2.000 | 1.000 | 1.000 |
| Total Liability | 30.000 | 6.500 | 14.500 | 1.000 | 8.000 |
Underwriting Commission
The underwriting commission is payable at the rate of 2.5% of the issue price of shares.
2.5
Thus, commission payable to A = 30,000 x 15 x 100 – Z 11,250
2.5
C = 20,000 x 15 x 100 – Z 7,
D = ! 7,500
Illustration 7
Wye Co. Ltd., invited the public to subscribe to the following:
(i) 10,000 equity shares of ` 100 each at a premium of 5% and
(ii) 2,50,000 in 14% Debentures of ` 100 @ 96.
60% of the shares and the whole of the issue of debentures were underwritten by M/s Sure and Fast for the commission allowable by the Government. The applications from the public totalled 6,000 shares and 2,000 debentures. The underwriters fulfilled their obligations. Show the journal entries that would appear in the books of the company. Underwritting commission is paid at 2.5%.
Solution:
Journal Entries
| Particulars | Dr. (7) | Cr (() |
| Bank Dr. | 8,22,000 | |
| To Equity Share Application and Allotment A/c | 6,30,000 | |
| To 14% Debenture Application and Allotment A/c | 1,92,000 | |
| (Receipt of application money on 6,000 Equity Shares | ||
| @ Z 105 each including premium of Z 5 each and on 2,000 debentures @ Z 96 each at a discount of Z4 each) | ||
| Equity Share Application and Allotment A/c Dr. | 6,30,000 | |
| To Equity Share Capital A/c | 6,00,000 | |
| To Securities Premium A/c | 30,000 | |
| (Allotment of 6,000 equity shares of Z 100 each at a premium of Z 5 each to public as per Board’s resolution dated…….. ) | ||
| 14% Debenture Application and Allotment A/c Dr. | 1,92,000 | |
| Discount on Issue of Debentures A/c Dr. | 8,000 | |
| To 14% Debenture A/c | 2,00,000 | |
| (Allotment of 2,000 14% Debentures of 2100 each at a discount of Z 4 each to public as per Board’s resolution dated……………. ) | ||
| M/s Sure and Fast Dr. | 2,52,000 | |
| To Equity Share Capital A/c | 2,40,000 | |
| To Securities Premium A/c | 12,000 | |
| (Allotment of 2,400 Equity Shares being 60% of 4,000 shares remaining unsubscribed to M/s Sure and Fast being their liability as per Board’s resolution dated.,,,,,,,,,,,,,,,,,……………..) |
| M/s Sure and Fast | Dr. | 48,000 | |
| Discount on Issue of Debentures A/c | Dr. | 2,000 | |
| To 14% Debentures A/c | 50,000 | ||
| (Allotment of 500 debentures allotted to M/s Sure and Fast being their liability as per Board’s resolution dated ……………) | |||
| Underwriting Commission A/c | Dr. | 19,830 | |
| To M/s Sure and Fast | 19,830 | ||
| (Underwriting Commission due on issue price of Shares @ 2.5% on 6,30,000 and on debentures @ 1.5% and 2.5% on 1,92,000 and 48,000 respectively) | |||
| Bank | Dr. | 2,80,170 | |
| To M/s Sure and Fast | 2,80,170 | ||
| [Receipt of the net amount due from M/s Sure and Fast, i.e., (2,52,000 + 48,000 — 19,830)] | |||
Working Notes:
(i) Liability of M/s Sure and Fast
Shares Debentures
(60%) (100%)
Gross liability 6,000 2,500
Less: Marked applications:
Shares Debentures
60% of 6,000 100% of 2,000 3,600 2,000
Net liability 2,400 500
(ii) Underwriting Commission
Underwriting Commission has been calculated as per the rates applicable in force :
Equity Shares Rs.
2.5% on issue price of 6,000 shares
underwritten = 6,30,000 x 2.5% 15,750
Debentures
On amounts subscribed by the public:
2.5% on issue price of 2,000 debentures Rs.
= 2,000 x 96 x 2.5% = 4,800
On amounts devolved on underwriters:
2.5% on issue price of 500 debentures
= 500 x 96 x 2.5% = 1,200 6,000
21,750