Problems relating to Underwriting of Shares and Debentures of Companies only

Underwriting is an agreement by a company with an underwriter to pay a commission for subscribing to or guaranteeing the subscription of shares or debentures. If the public does not subscribe fully, the underwriter is liable to subscribe for the remaining shares/debentures.

Accounting Treatment for Underwriting of Shares

A. When the Issue is Fully Subscribed:

• Only underwriting commission is paid to the underwriter.

• Entry:

Share Capital A/C Dr
To Share Application A/C
(On allotment of shares)

Underwriters A/C Dr
To Cash/Bank A/C
(On payment of commission)

B. When the Issue is Partially Subscribed:

• The underwriter pays for the unsubscribed shares.

Accounting Entry:

Share Application A/C Dr (to transfer received applications)
To Share Capital A/C
To Securities Premium A/C (if any)

Underwriters A/C Dr (for shares taken by underwriter)
To Share Capital A/C
To Securities Premium A/C

C. For Commission on Underwriting:

• Commission is calculated on shares actually underwritten.

• Entry:

Underwriting Commission A/C Dr
To Underwriters A/c

Key Formulas

1. Commission of Underwriter:

Commission = No. of shares underwritten × Rate of commission

2. Liability of Underwriter for Unsubscribed Shares:

Liability = Unsubscribed shares × Issue price per share