37 Underwriting Complete File

8/13/2019 37 Underwriting Complete File

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COMPANYACCOUNTS

UNDERWRITING OF SHARES AND DEBENTURES

Write short notes on:estion 1

rm underwriting. Also give the accounting entries relating to firm underwriting in the books of: (i) the

mpany (ii) the underwriter

wer

m underwriting signifies a definite commitment to take up a specified number of shares irrespective of the number of shares subscribed for by theic. In such a case, unless it has been otherwise agreed, the underwriters liability is determined without taking into account the number of sharesn up firm by him, i.e. the underwriter is obliged to take up :

1. the number of shares he has applied for firm and

!. the number of shares he is obliged to take up on the basis of the underwriting agreement.For e"ample, # underwrites $%& of an issue of 1%,%%% shares of 's. 1% each of () *o. +td. and also applies for 1,%%% shares, firm. he

erwriting commission is agreed to at the rate of !.- percent. In case there are marked applications for ,/%% shares, he will have to take up !,!%%res, i.e. 1,%%% shares for which he applied firm and 1,!%% shares to meet his liability of underwriting contract. If, on the other hand, theerwriting contract has provided that an abatement would be allowed in respect of shares taken up firm, the liability of # in the above0mentionede would only be for 1,!%% shares in total. he accounting entries in relation to firm underwriting of 1,%%% shares in the above e"ample are givenw :

Entries in the books of Y Co! "t#! (Co$%&n')

Dr. Cr.

Rs. Rs.

1. #s #ccount r. 1%,%%%o 23uity 4hare *apital #ccount 1%,%%%

56eing allotment of underwritten e3uity shares in pur0

suance of firm underwriting contract, vide 6oards resolution7

!. 8nderwriting *ommission on Issue of

4hares #ccount r. !-%

o #s #ccount !-%

56eing underwriting commission due to the underwriter

under the firm underwriting contract...7

9. 6ank #ccount r. ,;-%

o #s #ccount ,;-%

56eing money received in full settlement of account

from underwriter7

Entries in the books of A (Un#erwriter)Dr. Cr.Rs. Rs.

1. 8nderwriting #ccount r. 1%,%%%

o () *o. +td. #ccount 1%,%%%56eing the liability to take up necessary number of shares

of the company in pursuance of firm underwriting contract

recorded7

!. () *o. +td. #ccount r. !-%

o 8nderwriting #ccount !-%


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56eing underwriting commission income credited to

underwriting account7

9. () *o. +td. #ccount r. ,;-%

o 6ank #ccount ,;-%

56eing balance money paid to the company in full settlement

of account7

estion

rite a short note on Firm underwriting and "artial underwriting along with firm underwriting.

wer

In firm underwriting the underwriter agrees to subscribe upto a certain number of shares


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To an individual underwriter on the basis of his individual firm underwriting! or

To all the underwriters in the ratio of their gross liability

n other words! firm underwriting shares may be treated at par with either MarkedApplicationsor UnmarkedApplications.

Pr&+ti+&, Questions:

estion 1

Noman Ltd. issued 80,000 Equity Shares which were underwritten as follows:

r. ! "8,000 Equity Shares

essrs # $ Co. %0,000 Equity Shares

essrs C Cor&. '%,000 Eqiuty Shares

he a)o*e mentioned underwriters made a&&lications for +firm underwritin-s as follows:

r. ! ,"00 Equity Shares

essrs # $ Co. 8,000 Equity Shares

essrs C Cor&. %,"00 Equity Shares

he total a&&lications e/cludin- +firm underwritin-, )ut includin- mared a&&lications were for "0,000 Equity Shares.

he mared !&&lications were as under:

r. ! 8,000 Equity Shares

essrs # $ Co. '0,000 Equity Shares

essrs C Cor&. ",000 Equity Shares

(he underwritin- contracts &ro*ide that underwriters )e -i*en credit for +firm a&&lications and that credit for unmared a&&lications )e -i*en in&ortion to the shares underwritten2

are required to show the allocation of lia)ility. 4orin-s will )e considered as a &art of your answer.

swer

No$&n "t#!St&te$ent showin- "i&bi,it' of Un#erwriters

r. ! 5s. # $ Co. C Cor&n. (otal

>ross +iability?o. of shares7 /,%%% !%,%%% 1!,%%% /%,%%%nmarked #pplications@

'atio /:!%:1!7 1%,/%% ,-%% !,;%% 1/,%%%9;,!%% 1-,-%% ,9%% $!,%%%

Aarked #pplications /,%%% 1%,%%% ,%%% !!,%%%!,!%% -,-%% -,9%% %,%%%

irm underwriting $,%% /,%%% !,%% 1$,/%%alance to be taken under !!,/%% 0!,-%% !,%% !9,!%%

he contract*redit for e"cess of

B *o. 5ratio / : 1!7 !,%%% !,-%% -%%

et +iability !%,/%% !,%%dd:Firm 8nderwriting $,%% /,%%% !,%% 1$,/%%

otal +iability !;,!%% /,%%% ,/%% %,%%%

Workin- Note :otal #pplications %,%%% 4hares

Aarked #pplications !!,%%% 4hares

nmarked applications 1/,%%% 4hares

estion

int stoc com&any resol*ed to issue '0 lah equity shares of Rs. '0 each at a &remium of Re. ' &er share. 7ne lah of these shares were taen)y the directors of the com&any, their relati*es, associates and friends, the entire amount )ein- recei*ed forthwith. (he remainin- shares werered to the &u)lic, the entire amount )ein- ased for with a&&lications.

(he issue was underwritten )y , 3 and 9 for a commission %; of the issue &rice,


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','>,


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o (s #


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5-& on 1! lakhs shares E 1% each7 $,%%,%%% $,%%,%%% $,%%,%%%

amount to be paid by underwriters !,%,%%% 11,1%,%%% $,%%,%%%

0n the *ooks of S+or%io "t#!

/ourn&, Entries

Aarticulars Dr. Cr.

Rs. Rs.

8nderwriting commission #


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/ourn&, Entries in the books of 2e$ini "t#!

Rs. Rs.

#ccount r. !,%%,%%%

#ccount r. 9,%%,%%%

o 4hare *apital #ccount 9%,%%,%%%

o 4ecurities Gremium #ccount 1-,%%,%%%

ng the shares to be taken up by the underwriters7

erwriting *ommission #ccount r. 1-,%%,%%%

o #s #ccount ;,-%,%%%

o 6s #ccount -,%%,%%%

o *s #ccount !,-%,%%%

ng the underwriting commission due to theerwriters7

k #ccount r. 9,-%,%%%

o #s #ccount 9,-%,%%%

ng the amount received from underwriter # for the

res taken up by him after adHustment of hismission7

#ccount r. !,%%,%%%

o 6ank #ccount !,%%,%%%

ng the amount paid to underwriter 6 after adHustmentthe shares taken by him against underwritingmission due to him7

#ccount r. !,-%,%%%

o 6ank #ccount !,-%,%%%

ng the underwriting commission paid to *7

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37 Underwriting Complete File