CMA Inter - Corporate Accounting & Auditing

Underwriting of Securities
Underwriting is the contract between the company and an underwriter wherein
the underwriter agrees to subscribe the unsubscribed shares or debentures for a
commission.

Types of Application

a. Marked Application : It bears the stamp of an underwriter. Credit is given

to the individual underwriter.

b. Unmarked Application : Does not bear any stamp. Credit of unmarked

application is given to all the underwriters in the ratio of Gross Liability.

c. Firm Underwriting: It is an Unconditional Liability of the Underwriter.

Credit of Firm underwriting can be:
i. Treated as marked application : Credit is given to the individual
underwriter.
ii. Treated as unmarked application : Credit is given to all underwriters
in the ratio of Gross Liability.

Important points to note:

a. Underwriting commission can not be paid on shares subscribed the

promoters / directors and their relatives.

b. Maximum commission:
On shares : 5% of the issue amount including premium.
[5% of (No. of shares underwritten X issue price)]

On shares : 2.5% of the issue amount including premium.

[2.5% of (No. of debentures underwritten X issue price)]

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However, Question sometimes asks to calculate commission on Face Value.

c. Comission is calculated on the Gross Liability of the underwriter

d. Liability of Underwriter:
Conditional Liability = Gross Liab - Marked Appl – Unmarked Appl - Firm
Total Liab = Conditional Liab. + Firm Underwriting i.e. Unconditional liab.
Net Liability = Total Liability – Commission

Sometimes, Firm underwriting is already applied and paid by the

underwriters. In such cases,
Net Liability = Conditional Liability - Commission

e. Journal Entries
For shares to be subscribed by the underwriters:
Underwriter’s A/c Dr
To E.S.C
To S.P.

For commission
Underwriting commission A/c Dr
To Underwriter’s A/c

For Receipt or Payment

Bank A/c Dr (Receipt)

To Underwriter’s A/c

OR

Underwriter’s A/c Dr

To Bank A/c (Payment)

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Institute Material Questions

Question 1 (Determination of underwriting commission)
XYZ Ltd. is issuing 20,00,000 shares of `10 each to the public. N Ltd. has been appointed as the
underwriter for 5% of the issue size. The commission payable to the underwriter is 5% of the issue
price. Calculate the amount of underwriting commission payable to N Ltd. if the shares are issued at
par. How will your answer change if the shares are issued at 20% premium?

Solution:
When shares have been issued at par:
Gross Liability = 5% of 20,00,000 = 1,00,000 shares.
Issue price = Face value = ₹10 per share
Underwriting Commission = [Gross Liability (in shares) x Issue Price per share] x Rate of Commission
= [1,00,000 x 10] x 5% = ₹50,000.
When shares have been issued at a premium of 20%:
Gross Liability = 5% of 20,00,000 = 1,00,000 shares.
Issue price = 10 x 120% = ₹12 per share
Underwriting Commission = [Gross Liability (in shares) x Issue Price per share] x Rate of Commission
= [1,00,000 shares x 12] x 5% = ₹60,000

Question 2 (Single Underwriter – Full Underwriting)

A Ltd. issued 1,00,000 equity shares of ₹ 100 each at par to the public, underwritten only by B & Co.
The company received applications for 90,000 shares of which 80,000 shares were marked. Determine
the liability of the B & Co.

Solution:
Underwriting liability of M/s U & Co.
= No. of Shares Issued (-) No. of shares subscribed by the public
= 1,00,000 (-) 90,000
= 10,000 shares.

Question 3 (Full Underwriting, Multiple Underwriters, Without Firm Underwriting, Alternative

Treatment w.r.t Unmarked Applications)
A Ltd. issued 4,00,000 equity shares. The whole issue was underwritten as: X - 40%; Y - 30%; and Z -
30%.
Applications for 3,20,000 shares were received in all, out of which applications for 80,000 shares had the
stamp of X, those for 40,000 shares had that of Y and 80,000 shares had that of Z. The remaining
applications for 1,20,000 shares did not bear any stamp.
Calculate the liability of underwriters.
Find out the liability of the individual underwriters in each of the following situations:
(a) Unmarked applications are apportioned in the ratio of “Gross Liability”; and

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(b) Unmarked applications are apportioned in the ratio of “Gross Liability Less. Marked Applications”.

Solution
(i) When Unmarked applications are apportioned in the ratio of “Gross Liability” Calculation
of Liability of the underwriters (No. of shares)
Particulars X Y Z
Gross Liability 1,60,000 1,20,000 1,20,000
Less: Marked Applications 80,000 40,000 80,000
80,000 80,000 40,000
Less: Unmarked Applications 48,000 36,000 36,000
Net Liability 32,000 44,000 4,000
Working:
Unmarked applications = 1,20,000
Unmarked applications are apportioned in the ratio of “Gross Liability” i.e., 4:3:3

(ii) When Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked
Applications” Calculation of Liability of the underwriters (No. of shares)
Particulars X Y Z
Gross Liability 1,60,000 1,20,000 1,20,000
Less: Marked Applications 80,000 40,000 80,000
80,000 80,000 40,000
Less: Unmarked Applications 48,000 48,000 24,000
Net Liability 32,000 32,000 16,000

Working:
Unmarked applications = 1,20,000
Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked Applications”
i.e., 80,000:80,000:40,000 = 2:2:1

Question 4 (Full Underwriting, Multiple Underwriters, Without Firm Underwriting, Alternative

Treatment w.r.t Unmarked Applications, adjustment of surplus)
M Ltd., incorporated on April 1, 2021, issued a prospectus inviting applications for 5,00,000 equity
shares of 10 each. The issue was fully underwritten by A, B, C and D as follows: A - 2,00,000; B -
1,50,000; C - 1,00,000; and D - 50,000.

The applications were received for 4,50,000 shares of which marked applications were as follows: A -
2,20,000; B- 90,000; C - 1,10,000; and D - 10,000.

Find out the liability of the individual underwriters in each of the following cases:
(i) Unmarked applications are apportioned in the ratio of “Gross Liability”; and
(ii) Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked Applications”.

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Solution:
(i) When Unmarked applications are apportioned in the ratio of “Gross Liability” Calculation of
Liability of the underwriters (No. of shares)
Particulars A B C D
Gross Liability 2,00,000 1,50,000 1,00,000 50,000
Less: Marked Applications 2,20,000 90,000 1,10,000 10,000
(20,000) 60,000 (10,000) 40,000
Less: Unmarked Applications 8,000 6,000 4,000 2,000
(28,000) 54,000 (14,000) 38,000
Surplus of A & C apportioned between B & D in the ratio 28,000 (31,500) 14,000 (10,500)
of Gross Liability
Net Liability Nil 22,500 Nil 27,500

Working:
Unmarked applications = Total applications received – Marked applications
= 4,50,000 – (2,20,000 + 90,000 + 1,10,000 + 10,000) = 20,000

Unmarked applications are apportioned in the ratio of “Gross Liability” i.e., 4:3:2:1

(ii) When Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked
Applications” Calculation of Liability of the underwriters (No. of shares)
Particulars A B C D
Gross Liability 2,00,000 1,50,000 1,00,000 50,000
Less: Marked Applications 2,20,000 90,000 1,10,000 10,000
(20,000) 60,000 (10,000) 40,000
Surplus of A & C apportioned between B & D in the ratio of 20,000 (22,500) 10,000 (7,500)
Gross Liability
Nil 37,500 Nil 32,500
Less: Unmarked Applications Nil 10,714 Nil 9,286
Net Liability Nil 26,786 Nil 9,286

Working:
Total surplus = 20,000 + 10,000 = ₹30,000
This is to be apportioned between B and D in 150000:50000 = 3:1

Unmarked applications = Total applications received – Marked applications

= 4,50,000 – (2,20,000 + 90,000 + 1,10,000 + 10,000) = 20,000

Unmarked applications are apportioned between B and D in the ratio of “Gross Liability (-) Marked
Applications “ = i.e., 37,500: 32,500 = 15:13

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Question 5 (Full Underwriting, Multiple underwriters, Firm underwriting with Alternative

Treatment, Adjustment of Surplus)
Following underwriting took place for P Ltd. which invited applications for 10,000 shares of ` 10 each:
X: 6,000 shares Y: 2,500 shares Z: 1,500 shares

In addition, there were firm underwriting as follows:

X: 800 shares Y: 300 shares Z: 1,000 shares

Total subscription including firm underwriting was 7,100 shares, and the forms included the following
marked forms:
X: 1,000 shares Y: 2,000 shares Z: 500 shares

Show the allocation of liability of the underwriters, if –

(i) Firm underwriting is treated as unmarked applications.
(ii) Firm underwriting is treated as marked applications

Solution
(i) When firm underwriting is treated as unmarked applications.
Calculation of Liability of the underwriters (No. of shares)
Particulars X Y Z
Gross Liability 6,000 2,500 1,500
Less: Marked Applications 1,000 2,000 500
5,000 500 1,000
Less: Unmarked Applications 2,160 900 540
2,840 (400) 460
Surplus of Y apportioned between X & Z in the ratio of Gross Liability (12:3 or (320) 400 (80)
4:1)
Net Liability under contract 2,520 Nil 380
Add: Firm Underwriting 800 300 1,000
Net Liability 3,320 300 1,380
Working:
(1) Allocation of unmarked applications
Total Applications (including marked and firm underwriting) = 7,100

Marked applications = 1000 + 2000 + 500 = 3,500

Unmarked applications including firm underwriting = 7,100 – 3,500 = 3,600 to be shared in Gross
Liability i.e., 6000:2500:1500 = 12:5:3.

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(ii) When firm underwriting is treated as marked applications.

Calculation of Liability of the underwriters (No. of shares)
Particulars X Y Z
Gross Liability 6,000 2,500 1,500
Less: Marked Applications including firm underwriting 1,800 2,300 1,500
4,200 200 Nil
Less: Unmarked Applications 900 375 225
3,300 (175) (225)
Surplus of Y and Z apportioned to X (400) 175 225
Net Liability under contract 2,900 Nil Nil
Add: Firm Underwriting 800 300 1,000
Net Liability 3,700 300 1,000

Working:
(1) Marked Applications including firm underwriting
Particulars X Y Z
Marked applications 1,000 2,000 500
Add: Firm underwriting 800 300 1,000
1,800 2,300 1,500

(2) Allocation of unmarked applications

Total applications (including marked and firm underwriting) = 7,100

Marked applications (including firm underwriting) = 1800 + 2300 + 1500 = 5,600

Unmarked applications = 7,100 – 5,600 = 1,500 to be shared in Gross Liability i.e., 6000:2500:1500 = 12:5:3

Question 6 (Partial underwriting, Sole underwriter, Abatement allowed)

Mr. X underwrites 60% of an issue of 20,000 shares of `100 each of ABC Ltd. He has also agreed for
a firm underwriting for 1,600 shares. The company received applications for 13,600 shares out of which were
8,000 marked applications. Determine the number of shares to be taken up by Mr. X:
a) If the underwriting contract provides that no abatement would be allowed in respect of shares taken up
‘firm’.
b) If the underwriting contract provides that abatement would be allowed in respect of shares taken up
‘firm’.

Solution:
Gross Liability = 20,000 x 60% = 12,000 shares

No. of unsubscribed shares = Total no. of shares offered (–) No. of shares subscribed (including marked
applications)
= 20,000 – 13,600 = 6,400 shares.

Deficit of the underwriter = Gross Liability (-) Marked Applications

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= 12,000 – (8,000 + 1,600) = 2,400.

Net Liability under the underwriting contract = 6,400 or 2,400 – lower of the two = 2,400

Case (a) When no abatement would be allowed in respect of shares taken up ‘firm’
Number of shares to be taken up by the underwriter = ‘Net Liability under the underwriting contract’ +
Firm Underwriting = 2,400 + 1,600 = 4,000 shares

Case (b) When abatement would be allowed in respect of shares taken up ‘firm’
Number of shares to be taken up by the underwriter = ‘Net Liability under the underwriting contract’
or Firm Underwriting – whichever is higher. = 2,400 or 1,600 – higher of the two = 2,400 shares.

Question 7 (Partial underwriting, Multiple underwriters, Without Firm underwriting)

C Ltd. offered for the issue of 3,00,000 equity shares of Rs. 10 each. The issue was partially underwritten
by M, Nand O as follows: M - 40%; N - 30%; O - 20%. Applications were received for 2,40,000 shares
of which marked applications were as follows: M – 1,05,600 shares; N - 78,000 shares; O - 50,000
shares. There was no firm underwriting.

Required: (a) Compute the liability of the underwriters, (b) Determine how many share-remain
unissued.

Solution:
Calculation of Liability of the underwriters (No. of shares)
Particulars M N O
Gross Liability 1,20,000 90,000 60,000
Less: Marked Applications 1,05,600 78,000 50,000
Net Liability 14,400 12,000 10,000

Shares remained unissued = 3,00,000 – 2,40,000 – (14,400 + 12,000 + 10,000) = 23,600 shares.

Question 8 (Partial underwriting, Multiple underwriters, With Firm underwriting)

H Ltd. issued 1,50,000 shares which are underwritten as follows: A - 50%; B - 20%; and C - 20%. The
underwritersmade applications for firm underwriting as under: A - 6,000 shares, B - 3,000 shares, and C
- 3,000 shares.

The total subscriptions including firm underwriting was 1,45,500 shares and they included the following
marked forms: A - 78,000 shares, B - 27,000 shares, and C – 28,500 shares.

Compute the liability of each underwriter assuming shares underwritten ‘firm’ are treated as marked
applications.

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Solution
Calculation of Liability of the underwriters (No. of shares)
Particulars A B C
Gross Liability 75,000 30,000 30,000
Less: Marked Applications including firm underwriting 78,000 27,000 28,500
(3,000) 3,000 1,500
Surplus of A apportioned between B and C in the ratio of gross 3,000 (1,500) (1,500)
liability i.e., 20%: 20% or 1:1
Net Liability under contract Nil 1,500 Nil
Add: Firm Underwriting 6,000 3,000 3,000
No. of shares to be taken up 6,000 4,500 3,000

Question 9
M Ltd., incorporated on April 1, 2021, issued a prospectus inviting applications for 2,50,000 equity
shares of 10 each. The issue was fully underwritten by A, B, C and D as follows: A - 1,00,000; B -
75,000; C - 50,000; and D - 25,000.

The applications were received for 2,25,000 shares of which marked applications were as follows: A –
1,10,000; B- 45,000; C - 55,000; and D - 5,000.:

Unmarked applications are apportioned in the ratio of “Gross Liability”. Underwriters’ commission: 4%
of the issue price.

Required:
(a) Determine the underwriters’ liability in shares;
(b) Determine the underwriters’ liability in amount;
(c) Pass journal entries in the books of M Ltd. to record the above transactions.

Solution:
Calculation of Liability of the underwriters (No. of shares)
Particulars A B C D
Gross Liability 1,00,000 75,000 50,000 25,000
Less: Marked Applications 1,10,000 45,000 55,000 5,000
(10,000) 30,.000 (5,000) 20,000
Less: Unmarked Applications 4,000 3,000 2,000 1,000
(14,000) 27,000 (7,000) 19,000
Surplus of A & C apportioned between B & D in the ratio of 14,000 (15,750) 7,000 (5,250)
Gross Liability
Net Liability Nil 11,250 Nil 13,750

Working:
Unmarked applications = Total applications received – Marked applications
= 2,25,000 – (1,10,000+45,000+55,000+5,000) = 10,000

Unmarked applications are apportioned in the ratio of “Gross Liability” i.e., 4:3:2:1

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Calculation of Liability of the underwriters (in amount)

Particulars A B C D
Net Liability Nil 11,250 Nil 13,750
Total amount receivable on shares @ 10 Nil 1,12,500 Nil 1,37,500
Less: Underwriting Commission @ 4% on 40,000 30,000 20,000 10,000
(Issue price x Gross Liability)
(Amount Payable or Amount Receivable (40,000) 82,500 (20,000) 1,27,500

Accounting entries in the books of the issuer company

In the books of M Ltd.

Journal
Date Particulars Dr. Cr.
B A/c ................................... Dr. 1,12,500
D A/c .................................... Dr. 1,37,500
To Share Capital A/c 2,50,000
(Being shares allotted to underwriters as per Board’s resolution no….
dated….)
Underwriting Commission A/c Dr. 1,00,000
To A A/c 40,000
To B A/c 30,000
To C A/c 20,000
To D A/c 10,000
(Being underwriting commission payable to underwriters)
Bank A/c Dr. 2,10,000
To B A/c 82,500
To D A/c 1,27,500
(Being amount received from B and D)
A A/c Dr. 40,000
C A/c… Dr. 20,000
To Bank A/c
(Being amount paid to A and C) 60,000

Question 10
A joint stock company resolved to issue 5 lakh equity shares of 10 each at a premium of 1 per share.
50000 of these shares were taken up by the directors and their relatives, the entire amount beingreceived
forthwith. The remaining shares were offered to the public, the entire amount being asked for with
applications.

The issue was underwritten by P, Q and R for a commission of 2% of the issue price. 65% of the issue
was underwritten by P, while Q and R’s share were 25% and 10% respectively.

Their firm underwriting was as follows:

P 15000 shares, Q 10000 shares and R 5000 shares. The underwriters were to submit unmarked
applications for shares underwritten firm with full application money along with the members of the
general public.

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Marked applications were as follows: P 59750 shares, Q 28750 shares and R 5250 shares. Unmarked
applications totaled 350000 shares.

Accounts with the underwriters were promptly settled.You are required to:
(i) Prepare a statement calculating underwriters’ liability for shares other than shares underwritten
firm.
(ii) Pass necessary journal entries (narration not required) for all the transactions including the cash
transactions.

Answer: (i) Net Liability: P -2,000, Q – Nil, R – 4,250

Past Year Questions / MQPs
Question 11 (Dec 23 MQP 1)
Ratan & Co Ltd issued 10000 shares of ₹100 each at a Premium of ₹20 per share. The entire issues were
underwritten as follow:
A 5000 shares Firm underwriting 1000 shares
B 3000 shares Firm underwriting 500 shares
C 2000 shares Firm underwriting 500 shares

Shares applied for were 9000 shares. The following being the marked forms - A 3500 shares, B 1400
shares, C 1600 shares including firm under writing.

Compute the liability of each underwriter and compute how much commission will each underwriter
get assuming it is the maximum allowed by law?

Solution
Particulars A B C
Gross liability in shares 5000 3000 2000
(-) Un marked app. [2500 X 5: 3:2] 1250 750 500
Balance 3750 2250 1500
(-) Marked app 3500 1400 1600
Balance 250 850 -100
(-) Surplus of c to A & B in GL ratio 5:3 63 37 100
Net liability in shares 187 813 0
(+) Firm underwriting 1000 500 500
Total liability 1187 1313 500
Commission will be @ 5% of the issue price of shares under written as shown below.
5000 *120 * 5
A= * 30000
100
3000 *120 *5
B= *18000
100
2000 *120 * 5
C= * 12000
100

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Question 12 ( June 24 PYQ)

T ltd invited applications from public for 2,00,000 shares of 100 each at a premium of 20 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 6,000; 4,000; 2,000; and 2,000 shares
respectively.

The company received applications for 1,40,000 shares from the public out of which applications for
38,000, 20,000, 42,000 and 16,000 shares were marked in favour of A, B, C and D respectively. The
applications received from the public do not include firm underwriting.

Calculate the liability of each of the underwriters.

Solution
Liability of the underwriters (No. of shares)
Particulars A B C D
Share of gross liability 30% 30% 20% 20%
Gross Liability 60,000 60,000 40,000 40,000
Net Liability 7,000 25,000 Nil 14,000
Add: Firm Underwriting 6,000 4,000 2,000 2,000
Total Liability 13,000 29,000 2,000 16,000

Question 13 (Dec 24 MQP II)

M Ltd., incorporated on April 1, 2023, issued a prospectus inviting applications for 5,00,000 equity
shares of ₹10 each. The issue was fully underwritten by A, B, C and D as follows:
A - 2,00,000; B - 1,50,000; C - 1,00,000; and D - 50,000.

The applications were received for 4,50,000 shares of which marked applications were as follows:
A - 2,20,000; B- 90,000; C - 1,10,000; and D - 10,000.

Calculate the liability of the individual underwriters in each of the following cases:
a. Unmarked applications are apportioned in the ratio of “Gross Liability” and
b. Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked
Applications”.
Solution
a. When unmarked applications are apportioned in the ratio of “Gross Liability” Calculation of
Liability of the underwriters (No. of shares)
Particulars A B C D
Gross Liability 2,00,000 1,50,000 1,00,000 50,000
Less: Marked Applications 2,20,000 90,000 1,10,000 10,000
(20,000) 60,000 (10,000) 40,000
Less: Unmarked Applications 8,000 6,000 4,000 2,000
(28,000) 54,000 (14,000) 38,000
Surplus of A & C apportioned 28,000 (31,500) 14,000 (10,500)
between B & D in the ratio of Gross Liability
Net Liability Nil 22,500 Nil 27,500

Working:
Unmarked applications = Total applications received – Marked applications
= 4,50,000 – (2,20,000 + 90,000 + 1,10,000 + 10,000) = 20,000

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Unmarked applications are apportioned in the ratio of “Gross Liability” i.e., 4:3:2:1

b. When Unmarked applications are apportioned in the ratio of “Gross Liability (-) Marked
Applications”
Calculation of Liability of the underwriters (No. of shares)
Particulars A B C D
Gross Liability 2,00,000 1,50,000 1,00,000 50,000
Less: Marked Applications 2,20,000 90,000 1,10,000 10,000
(20,000) 60,000 (10,000) 40,000
Surplus of A & C apportioned between B 20,000 22,500 10,000 7,500
& D in the ratio of Gross Liability
Nil 37,500 Nil 32,500
Less: Unmarked Applications Nil 10,714 Nil 9,286
Net Liability Nil 26,786 Nil 23,214

Working:
Total surplus = 20,000 + 10,000 = 30,000
This is to be apportioned between B and D in 150000:50000 = 3:1

Unmarked applications = Total applications received – Marked applications

= 4,50,000 – (2,20,000 + 90,000 + 1,10,000 + 10,000) = 20,000

Unmarked applications are apportioned between B and D in the ratio of “Gross Liability (-) Marked
Applications” = i.e., 37,500: 32,500 = 15:13

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