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Underwriting of Shares and Debentures

Today evening, I took the class of student who did call me for learning corporate accounting from me. I taught her underwriting of shares and debentures. Same thing, I am sharing with you.

What is Underwriting of Shares and Debentures

Underwriting of shares and debentures is a contract between company and second party. Second party is called underwriters. They promise to sell all the shares of company to public, if any shares or debentures will be unsold, they will buy all these shares or debentures. For this service, they get underwriting commission.


What is Underwriting Commission

Underwriting commission is payment which is given by company to underwriters for their services of underwriting. Actually, contract of underwriting is same as the contract of insurance. Company gives maximum 5% commission to underwriter for selling his shares. Underwriter will take the risk of takeover the shares which will not be subscribed by public.

How to Calculate Underwriter's liability

For calculating underwriter's net liability, you have to understand marked application, unmarked application and firm underwriting. Suppose, there are three underwriters. Name of them are x, y and z
and they take the gross liability to sell company's share

x = 48,000
y = 20,000
z = 12,000
  • First of all we deduct all unmarked application of shareholders because
    with this liability of underwriters will decrease
  • Then, you will deduct all marked application of shareholders because
    with this liability of underwriters will also decrease
  • Then, you will deduct all the number of shares which will be taken under
    firm underwriting contract.
  • Now balance amount will show the number of shares which will be taken
    under the contract. If there is any negative number, then these will be
    adjusted with other underwriters in gross liability ratio
  • After this adjustment, balance number will show as net liability of
    underwriters.
For calculating underwriter's liability, student has to make statement showing underwriter's liability.




Accounting Treatment of Underwriting in the Books of Company

In the books of company, you will pass following journal entries.

1. When company gets money from public for selling shares under the contract of underwriting.

Bank account Dr. XXXX
Share capital Account Cr. XXXX

2. When underwriter takes the liability of unsold shares

Underwriter's account Dr. XXXX
Share Capital Account Cr. XXXX

3. When underwriting commission will due

Underwriting Commission Account Dr. XXXX
Underwriter's Account Cr. XXXX

4. When Underwriter deduct his commission and send net amount of takeover shares

Bank Account Dr. XXXX
Underwriter Account ( Total receivable amount on takeover shares by underwriter - Underwriter's commission) Cr. XXXX

COMMENTS

: 15
  1. Thank you so much for the information sir..

    ReplyDelete
  2. Thanks a lot for this

    ReplyDelete
  3. good language for understading the meaning of marked and unmarked application

    ReplyDelete
  4. Thank u very much for making easy to learn example for underwriting of share,

    ReplyDelete
  5. made it really easy to understand and retain.

    ReplyDelete
  6. thank you so much for your help, but could you help define the nature of account such as liability,asset or equity cos it's new for me.


    Thank very much for your help

    ReplyDelete
  7. really easy to understand.thank you

    ReplyDelete
  8. thank u sir for ur best efforts to make me understand

    ReplyDelete
  9. sir, how you got less unmarked application:10800 please anyone explain

    ReplyDelete
  10. This is really strange to see the number of unmarked application deducted without any kind of any calculation. Nothing is given in the question itself too. How can anybody understand on what base something is deducted from something? and, the students are also responding as if they are really getting all.

    ReplyDelete
  11. Is there any fix percentage to find underwriting commission?

    ReplyDelete
    Replies
    1. If nothing is mentioned in question then 5% as per company law 2013.

      I

      Delete
  12. What will be the journal entries in the Books of underwriter?

    ReplyDelete
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Accounting Education: Underwriting of Shares and Debentures
Underwriting of Shares and Debentures
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Accounting Education
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