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