Company Accounts
UNDERWRITING
OF SHARES AND DEBENTURES
(A) Write short notes on:
Question 1
“Firm”
underwriting. Also give the accounting entries relating to firm underwriting in
the books of: (i) the company, (ii) the underwriter
Answer
‘Firm’
underwriting signifies a definite commitment to take up a specified number of
shares irrespective of the number of shares subscribed for by the public. In
such a case, unless it has been otherwise agreed, the underwriter’s liability
is determined without taking into account the number of shares taken up ‘firm’
by him, i.e. the underwriter is obliged to take up :
1. the number of shares he has applied for
‘firm’; and
2. the number of shares he is
obliged to take up on the basis of the underwriting agreement.
For
example, A underwrites 60% of an issue of 10,000 shares of Rs. 10 each of XY
Co. Ltd. and also applies for 1,000 shares, ‘firm’. The underwriting commission
is agreed to at the rate of 2.5 percent. In case there are marked applications
for 4,800 shares, he will have to take up 2,200 shares, i.e. 1,000 shares for
which he applied ‘firm’ and 1,200 shares to meet his liability of underwriting
contract. If, on the other hand, the underwriting contract has provided that an
abatement would be allowed in respect of shares taken up ‘firm’, the liability
of A in the above-mentioned case would only be for 1,200 shares in total. The
accounting entries in relation to firm underwriting of 1,000 shares in the
above example are given below :
Entries in the
books of XY Co. Ltd. (Company)
Dr. Cr.
Rs. Rs.
1. A’s
Account Dr. 10,000
To Equity Share Capital
Account 10,000
(Being allotment of underwritten equity shares
in pur-
suance of firm underwriting contract, vide Board’s
resolution)
2. Underwriting
Commission on Issue of
Shares Account Dr. 250
To A’s Account 250
(Being underwriting commission due
to the underwriter
under the firm underwriting
contract...)
3. Bank
Account Dr. 9,750
To A’s Account 9,750
(Being money received in full
settlement of account
from underwriter)
Entries in the books of A (Underwriter)
Dr. Cr.
Rs. Rs.
1. Underwriting
Account Dr. 10,000
To XY Co. Ltd. Account 10,000
(Being the liability to take up
necessary number of shares
of the company in pursuance of firm
underwriting contract
recorded)
2. XY
Co. Ltd. Account Dr. 250
To Underwriting Account 250
(Being underwriting commission
income credited to
underwriting account)
3. XY
Co. Ltd. Account Dr. 9,750
To Bank Account 9,750
(Being balance money paid to the
company in full settlement
of account)
Question 2
Write a short note on Firm underwriting
and Partial underwriting along with firm underwriting.
Answer
In firm underwriting the underwriter agrees to subscribe upto a
certain number of shares/debentures irrespective of the nature of public
response to issue of securities. He gets
these securities even if the issue is fully subscribed or over-subscribed.
These securities are taken by the underwriter in addition to his liability for
securities not subscribed by the public.
Under partial underwriting along with firm underwriting, unless
otherwise agreed, individual underwriter does not get the benefit of firm
underwriting in determination of number of shares/debentures to be taken up by
him.
Question 3
What are the terms used
in under writing?
Ans: a. Marked Applications:
i. The
application forms bearing the stamp of the underwriter are termed as “Marked
Application forms.
ii. The
benefit of marked applications is given to the concerned underwriters in whose
favour application forms have
been marked.
b. Unmarked Applications:
i. The
application forms which do not bear the stamp of the underwriter are termed as
‘Unmarked
Application forms’.
ii. The
benefit of unmarked applications is given first to the company to the extent of
issue
not underwritten by underwriters
(in
case any part of the issue is not underwritten).
iii. In
case there is surplus, the benefit of surplus unmarked applications will be
given to
the underwriters in the ratio of their
gross
liability.
c. Full Underwriting:
i. When
the entire issue is underwritten such underwriting is termed as ‘full
underwriting’.
For example, X Ltd. decided to
make a public issue of
1,00,000 Equity Shares of Rs. 10 each
which is entirely underwritten by A,B,C and D in the ratio of 2:2:1:1.
ii. In
such a case the benefit of unmarked applications is given to the underwriter in
the
ratio of their gross liability i.e., 2:2:1:1.
d. Partial Underwriting:
i. When
only a part of issue is underwritten, such underwriting is termed as ‘Partial Underwriting’.
For example, X Ltd.,
decided to make a public issue
of 1,00,000 Equity
Shares of Rs. 10 each out of which 90,000 shares
are underwritten by A, B,
C and D in the
ratio of 2:2:1:1. It means 10,000 shares are underwritten by the company
itself.
ii. In
such a case, the benefit of unmarked applications will first be given to the
company.
iii. In case there is surplus, such
surplus will be distributed among other underwriters in
the ratio of their gross liability.
e. Sole Underwriting:
i. When
the issue is underwritten only by one underwriter, such underwriting is termed
as
‘Sole
Underwriting’.
For example, if
an issue of 1,00,000 shares of
Rs. 10 each of X Ltd.,
is underwritten by A, it is a case of sole
underwriting.
ii. In
such a case, the distinction between marked and unmarked applications is not of
such significance.
f. Joint Underwriting:
i. When
the issue is underwritten by two or more underwriters, such underwriting is
termed
as ‘Joint
Underwriting’.
For
Example, if an issue of 1,00,000 shares of Rs.
10 each of X Ltd.,
is underwritten by A, B, C and D in the ratio
2:2:1:1, it is a
case of joint underwriting.
ii. In
such a case the benefit of unmarked applications is given to the underwriters
in the
ratio of their gross liability.
iii. The
benefit of marked applications is given to the concerned underwriters in whose
favour applications have been marked.
g. Firm Underwriting:
i. Meaning: Firm
underwriting refers to a definite commitment by the underwriter to take
up a specified number of securities
irrespective of the number of
securities subscribed
by the public.
For example, the entire issue
of X Ltd., is underwritten as follows:
A.
1,60,000 shares (firm underwriting 3,600 shares)
B.
1,60,000 shares (firm underwriting 2,000 shares)
C.
80,000 shares (firm underwriting 1,200 shares)
D.
80,000 shares (firm underwriting 10,000 shares)
In
this case only 4,63,200 shares (i.e., 4,80,000 shares –
firm underwriting of 16,800 shares)
will be offered to public and
16,800
shares will be taken up by the underwriters even
if the issue is oversubscribed.
ii. Treatment: The benefit of firm
underwriting may be given either.
Ø To an individual underwriter
on the basis of his individual firm underwriting, or
Ø To all the
underwriters in the ratio of their gross liability
In other words, firm
underwriting shares may be treated at par with either ‘Marked Applications’ or ‘Unmarked Applications’.
(B) Practical
Questions:
Question 1
Noman
Ltd. issued 80,000 Equity Shares which were underwritten as follows:
Mr.
A 48,000
Equity Shares
Messrs
B & Co. 20,000
Equity Shares
Messrs
C Corp. 12,000
Eqiuty Shares
The
above mentioned underwriters made applications for ‘firm’ underwritings as
follows:
Mr.
A 6,400
Equity Shares
Messrs
B & Co. 8,000
Equity Shares
Messrs
C Corp. 2,400
Equity Shares
The
total applications excluding ‘firm’ underwriting, but including marked
applications were for 40,000
Equity Shares.
The
marked Applications were as under:
Mr.
A 8,000
Equity Shares
Messrs
B & Co. 10,000
Equity Shares
Messrs
C Corp. 4,000
Equity Shares
(The
underwriting contracts provide that underwriters be given credit for ‘firm’
applications and that credit for unmarked applications be given in proportion
to the shares underwritten)
You are required to show the allocation of
liability. Workings will be considered as a part of your answer.
Answer
Noman Ltd.
Statement
showing Liability of Underwriters
Mr.
A M/s. B & Co. C Corpn. Total
Gross
Liability
(No.
of shares) 48,000 20,000 12,000 80,000
Unmarked
Applications*
(Ratio
48:20:12) 10,800 4,500 2,700 18,000
37,200 15,500 9,300 62,000
Marked
Applications 8,000 10,000 4,000 22,000
29,200 5,500 5,300 40,000
Firm
underwriting 6,400 8,000 2,400 16,800
Balance
to be taken under 22,800 -2,500 2,900 23,200
the
contract
Credit
for excess of
B
& Co. (ratio 48 : 12) 2,000 2,500 500
Net
Liability 20,800 2,400
Add:
Firm Underwriting 6,400 8,000 2,400 16,800
Total
Liability 27,200 8,000 4,800 40,000
Working
Note :
* Total
Applications 40,000 Shares
Marked
Applications 22,000 Shares
Unmarked
applications 18,000 Shares
Question 2
A joint stock company resolved to issue 10 lakh equity shares
of Rs. 10 each at a premium of Re. 1 per share. One lakh of these shares were
taken up by the directors of the company, their relatives, associates and
friends, the entire amount being received forthwith. The remaining shares were
offered to the public, the entire amount being asked for with applications.
The issue was underwritten by X, Y and Z
for a commission @2% of the issue price, 65% of the issue was underwritten by
X, while Y’s and Z’s shares were 25% and 10% respectively. Their firm
underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z
10,000 shares. The underwriters were to submit unmarked applications for shares
underwritten firm with full application money along with members of the general
public.
Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z
10,500 shares.
Unmarked applications totalled 7,00,000
shares.
Accounts with the underwriters were
promptly settled.
You are required to :
(i) Prepare
a statements calculating underwriters’ liability for shares other than shares
underwritten firm.
(ii) Pass
journal entries for all the transactions including cash transactions.
Answer
(i) Statement
showing underwriters’ liability for shares other
than
shares underwritten firm
X Y Z Total
Gross
liability 5,85,000 2,25,000 90,000 9,00,000
(9,00,000
shares in the ratio of 65 : 25 : 10)
Less
: Allocation of unmarked
applications
(including firm
underwriting i.e. 7,00,000) in the
ratio 65 : 25 : 10 4,55,000 1,75,000 70,000 7,00,000
10,500 (7,500) 9,500 12,500
Surplus
of Y allocated to X and
Z
in the ratio 65 : 10 (6,500) 7,500 (1,000) – 4,000 – 8,500 12,500
Rs. Rs. Rs.
Liability
amount @ Rs. 11 44,000 – 93,500
Underwriting
commission payable
(Gross
liability × Rs. 11 × 2%) 1,28,700 49,500 19,800
Net
Amount payable 84,700 49,500
Net
Amount receivable 73,700
(ii) Journal
Entries
Dr. Cr.
Bank
A/c Dr. 11,00,000
To
Equity Shares Application A/c 11,00,000
(Being
application money received on 1 lakh equity
shares
@ Rs. 11 per share)
Bank
A/c Dr. 97,62,500
To
Equity Share Application A/c 97,62,500
(Application
money received on 8,87,500 equity shares
@
Rs. 11 per share from general public and underwriters
for
shares underwritten firm)
Equity
Share Application A/c Dr. 1,08,62,500
X’ s A/c Dr. 44,000
Z’ s A/c Dr. 93,500
To
Equity Share Capital A/c 1,00,00,000
To
Securities Premium A/c 10,00,000
(Allotment
of 10 lakh equity shares of Rs. 10 each at a
premium
of Re. 1 per share)
Underwriting
commission A/c Dr. 1,98,000
To
X’s A/c 1,28,700
To
Y’s A/c 49,500
To
Z’s A/c 19,800
(Amount
of underwriting commission payable to X,
Y
and Z @2% on the amount of shares
underwritten)
Bank
A/c Dr. 73,700
To
Z’s A/c 73,700
(Amount
received from Z in final settlement)
X’s
A/c Dr. 84,700
Y’s
A/c Dr. 49,500
To
Bank A/c 1,34,200
(Amount paid to X and Y in final settlement)
Question 3
Scorpio
Ltd. came out with an issue of 45,00,000 equity shares of Rs. 10 each at a
premium of Rs. 2 per share. The
promoters took 20% of the issue and the balance was offered to the public. The issue was equally underwritten by A &
Co; B & Co. and C & Co.
Each
underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000 equity shares
were received with marked forms for the underwriters as given below:
|
A & Co.
|
7,25,000 shares
|
|
B & Co.
|
8,40,000 shares
|
|
C & Co.
|
13,10,000 shares
|
|
Total
|
28,75,000 shares
|
The
underwriters are eligible for a commission of 5% on face value of shares. The entire amount towards shares subscription
has to be paid alongwith application.
You are required to:
(a) Compute the underwriters liability (number
of shares)
(b) Compute the amounts payable or due to
underwriters; and
(c) Pass necessary journal entries in the books
of Scorpio Ltd. relating to underwriting.
Answer
(a) Computation of liabilities of underwriters
(No. of shares):
|
|
A & Co.
|
B & Co.
|
C & Co.
|
|
Gross
liability
|
12,00,000
|
12,00,000
|
12,00,000
|
|
Less: Firm underwriting
|
1,00,000
|
1,00,000
|
1,00,000
|
|
|
11,00,000
|
11,00,000
|
11,00,000
|
|
Less: Marked applications
|
7,25,000
|
8,40,000
|
13,10,000
|
|
|
3,75,000
|
2,60,000
|
(2,10,000)
|
|
Less: Unmarked applications distributed
to A & Co. and B & Co. in equal
ratio
|
1,12,500
|
1,12,500
|
Nil
|
|
|
2,62,500
|
1,47,500
|
(2,10,000)
|
|
Less: Surplus of C & Co. distributed to
|
|
|
|
|
A & Co. and B & Co. in equal ratio
|
1,05,000
|
1,05,000
|
2,10,000
|
|
Net liability
(excluding firm underwriting)
|
1,57,500
|
42,500
|
Nil
|
|
Add: Firm underwriting
|
1,00,000
|
1,00,000
|
1,00,000
|
|
Total
liability (No. of shares)
|
2,57,500
|
1,42,500
|
1,00,000
|
(b) Computation of amounts payable by
underwriters:
|
|
|
|
|
|
Liability
towards shares to be subscribed
|
|
|
|
|
@ 12 per
share
|
30,90,000
|
17,10,000
|
12,00,000
|
|
Less: Commission
|
|
|
|
|
(5% on 12 lakhs shares @ 10 each)
|
6,00,000
|
6,00,000
|
6,00,000
|
|
Net amount to
be paid by underwriters
|
24,90,000
|
11,10,000
|
6,00,000
|
(c) In the Books of
Scorpio Ltd.
Journal Entries
|
|
Particulars
|
Dr.
|
Cr.
|
|
|
|
Rs.
|
Rs.
|
|
|
Underwriting
commission A/c
|
Dr.
18,00,000
|
|
|
|
To A & Co. A/c
|
|
6,00,000
|
|
|
To B & Co. A/c
|
|
6,00,000
|
|
|
To C & Co. A/c
|
|
6,00,000
|
|
|
(Being
underwriting commission on the shares underwritten)
|
|
|
|
|
|
|
|
|
|
A & Co.
A/c
|
Dr.
30,90,000
|
|
|
|
B & Co.
A/c
|
Dr.
17,10,000
|
|
|
|
C & Co.
A/c
|
Dr.
12,00,000
|
|
|
|
To Equity share capital A/c
|
|
50,00,000
|
|
|
To Share premium A/c
|
|
10,00,000
|
|
|
(Being shares
including firm underwritten shares allotted to underwriters)
|
|
|
|
|
Bank A/c
|
Dr.
42,00,000
|
|
|
|
To A & Co. A/c
|
|
24,90,000
|
|
|
To B & Co. A/c
|
|
11,10,000
|
|
|
To C & Co. A/c
|
|
6,00,000
|
|
|
(Being the
amount received towards shares allotted to underwriters less underwriting
commission due to them)
|
|
|
Question 4
Gemini Ltd. came up with public issue of 30,00,000
Equity shares of Rs. 10 each at Rs. 15 per share. A, B and C took underwriting of the issue in
3 : 2 : 1 ratio.
Applications were
received for 27,00,000 shares.
The marked
applications were received as under:
|
A
|
8,00,000 shares
|
|
B
|
7,00,000 shares
|
|
C
|
6,00,000 shares
|
Commission payable
to underwriters is at 5% on the face value of shares.
(i) Compute
the liability of each underwriter as regards the number of shares to be taken
up.
(ii) Pass
journal entries in the books of Gemini Ltd. to record the transactions relating
to underwriters.
Answer
(i) Computation of liability of
underwriters in respect of shares
|
|
(In shares)
|
||
|
|
A
|
B
|
C
|
|
Gross liability
|
15,00,000
|
10,00,000
|
5,00,000
|
|
Less: Unmarked
applications
|
3,00,000
|
2,00,000
|
1,00,000
|
|
|
12,00,000
|
8,00,000
|
4,00,000
|
|
Less: Marked
applications
|
8,00,000
|
7,00,000
|
6,00,000
|
|
|
4,00,000
|
1,00,000
|
(2,00,000)
|
|
Surplus of C distributed to A & B in
3:2 ratio
|
1,20,000
|
80,000
|
2,00,000
|
|
Net liability
|
2,80,000
|
20,000
|
Nil
|
(ii) Journal
Entries in the books of Gemini Ltd.
|
|
|
Rs.
|
Rs.
|
|
A’s Account
|
Dr.
|
42,00,000
|
|
|
B’s Account
|
Dr.
|
3,00,000
|
|
|
To
Share Capital Account
|
|
|
30,00,000
|
|
To
Securities Premium Account
|
|
|
15,00,000
|
|
(Being the shares to be taken up by the
underwriters)
|
|
|
|
|
Underwriting Commission Account
|
Dr.
|
15,00,000
|
|
|
To
A’s Account
|
|
|
7,50,000
|
|
To
B’s Account
|
|
|
5,00,000
|
|
To
C’s Account
|
|
|
2,50,000
|
|
(Being the underwriting commission due
to the underwriters)
|
|
|
|
|
Bank Account
|
Dr.
|
34,50,000
|
|
|
To
A’s Account
|
|
|
34,50,000
|
|
(Being the amount received from
underwriter A for the shares taken up by him after adjustment of his
commission)
|
|
|
|
|
B’s Account
|
Dr.
|
2,00,000
|
|
|
To
Bank Account
|
|
|
2,00,000
|
|
(Being the amount paid to underwriter B
after adjustment of the shares taken by him against underwriting commission
due to him)
|
|
|
|
|
C’s Account
|
Dr.
|
2,50,000
|
|
|
To
Bank Account
|
|
|
2,50,000
|
|
(Being the underwriting commission paid
to C)
|
|
|
|
