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.
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.
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.
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
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
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.
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
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Thank you so much for the information sir..
ReplyDeleteThanks a lot for this
ReplyDeletegood language for understading the meaning of marked and unmarked application
ReplyDeleteThank u very much for making easy to learn example for underwriting of share,
ReplyDeletethanx sir
ReplyDeletemade it really easy to understand and retain.
ReplyDeletethank 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.
ReplyDeleteThank very much for your help
thanks
ReplyDeletereally easy to understand.thank you
ReplyDeletethank u sir for ur best efforts to make me understand
ReplyDeletesir, how you got less unmarked application:10800 please anyone explain
ReplyDeleteThis 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.
ReplyDeleteIs there any fix percentage to find underwriting commission?
ReplyDeleteIf nothing is mentioned in question then 5% as per company law 2013.
DeleteI
What will be the journal entries in the Books of underwriter?
ReplyDelete