COMPANY ACCOUNTS UNDERWRITING

 UNDERWRITING

Underwriting in the context of a company means undertaking a responsibility or giving a guarantee that the shares or debentures offered to the public will be subscribed for. There are firms which undertake this sort of work and are very useful to companies which want to raise funds by the issue price of the whole of the shares or debentures underwritten. A company cannot pay commission on issue of shares unless it is provided for in its Articles. Commission cannot be paid to any person on shares or debentures which are not offered to the public for subscription [sec. 76(4A)].

The law limits the commission on issue of share to 5% for shared and 2 1/2% for debentures. This has to be disclosed in the prospectus.

Sub-underwriters :

These are underwriters who work under other underwriters. For subscriptions procured by them, the underwriter gets a small commission called overall commission.

Brokerage :

It is merely the act of procuring subscriptions for shares or debentures without undertaking any responsibility.

Marked Applications:

Underwriters issue application forms stamped with their name for shares and debentures to the public.

Underwriting commission :

The entry for underwriting commission is :

Underwriting commission on Issue of Shares A/c                 Dr.

To Underwriter A/c

The underwriter can also take part responsibility. In such a case his liability will have to be calculated accordingly.

Illustration 7 :

Dale Ltd. has Authorised Capital of Rs. 8,00,000. The company issues 20,000 equity shares of Rs. 10 each at a premium of Rs. 5 per share payable as :

On application — Rs. 6 (including premium Rs. 3) On allotment — Rs. 5 (including balance of premium)

Balance in two calls.

Applications were received for 35,000 shares. The applicants were divided in the following groups :

Group A  —  Applying for 5,000 shares allotted fully.

Group B — Applying for 20,000 shares are made prorata allotment for 15,000 shares.

Group C  —  Applying for total 10,000 shares are refunded.

Directors while making allotment adjust the excess amount received on application against allotment money due. When second and final calls were made, shareholders holding 500 shares failed to pay the final call money. The directors forfeited these shares. All the forfeited shares were reissued at Rs. 9 per share.

It is agreed that brokerage @ 3% and underwriting commission @ 3% will be paid for this issue. Claims of brokers and underwriters are satisfied by issuing to them additional equity shares of Rs. 10 each at a premium of Rs. 5 per share (without any cash payment).

Show Journal Entries and the Balance Sheet of the company in the books of the company.

Solution :

In the books ofDale Limited

	Particulars		Dr. (Rs.)	Cr. (Rs.)
Bank Account			2,10,000
To Equity Share Application Account				2,10,000
(application money recd. on 35000 shares @ Rs.6
share)
Equity Share Application Account			60,000
To Bank Account				60,000
(being application money on 10,000 shares refunded)
Equity share Application Account			1,20,000
To Equity Share Capital A/c				60,000
To Security Share Premium A/c				60,000
(being application money on 20000 shares transferred
to share premium and share capital)
Equity Share Application A/c			30,000
To Equity Share Allotment A/c				30,000
( Excess application money received on application
transferred to share allotment account as per board's
resolution No........ Dated.......)
Equity Share Allotment A/c			1,00,000
To Equity Share Capital A/c				60,000
To Security Premium A/c				40,000
(Amount due on allotment A/c @ Rs. 5 per share
including a premium  of Rs. 2 as per board’s
resolution No. .......... Dated....... )
Bank Account			70,000
To Equity Share Allotment A/c				70,000
(being balance of allotment money recd. in full)

Equity Share First Call A/c			40,000
To Equity Share Capital A/c			40,000
(being call money due on 20000 shares @ Rs.2 /share)
Bank Account			40,000
To Equity Share First Call A/c			40,000
(being first call money recd.)
Equity Share Final Call A/c			40,000
To Equity Share Capital A/c.			40,000
(being call money due on 20000 shares @ Rs. 2/share)
Bank Account			39,000
To Equity Share Final Call A/c.			39,000
(being call money on 19500 share received)
Equity Share Capital Account			5,000
To Equity Share Final Call A/c.			1,000
To share forfeiture account			4,000
(being 500 shares forfeited)
Bank Account			4,500
Share Forfeiture Sccount			500
To Equity Share Capital Account			5,000
(being 500 shares reissued @Rs. 9/share)
Share Forfeiture A/c			3,500
To Capital Reserve A/c			3,500
(being profit on forfeiture transferred to capital
reserve)
Brokerage Account			6,000
Commission Account			6,000
To Equity Share Capital A/c.			8,000
To Security Premium Account			4,000
(Commission and Brokerage paid)

Balance Sheet of Dale Ltd.

Liabilities	Rs.	Assets		Rs.
Share Capital		Fixed Assets
Authorised (80000 share of Rs. 10 each)	8,00,000	Investments
Issued, subscribed and paid		Current Assets, Loans & Advances
20800 equity shares of Rs. 10 each		Current Assets
(800 shares issued for		Bank balance		3,03,500
consideration other than cash)	2,08,000	Miscellaneous Expenditure
Reserves & Surplus		Brokerage on issue of shares		6,000
Security premium	1,04,000	Commission on issue of shares		6,000
Capital reserves	3,500
	3,15,500			3,15,500