Illustration 2.1
Model: Journalizing transactions entire issue underwritten by one underwriter
ABC Ltd. issued 1,00,000 equity shares of images 10 each at par. The issue was undertaken by Sure Shares & Co. for maximum commission permitted by law. The public applied for and received 70,000 shares.
Pass journal entries in the books of ABC Ltd. and also show how these items will appear in the balance sheet of ABC Ltd.
Solution
BASIC CALCULATIONS:
*1. Underwriting commission:
According to the Companies Act (Section 76), the maximum commission allowed is 5% on the issue value.
However, according to SEBI Guidelines, the maximum commission permitted is 2.5%. The latest guidelines are to be taken into account.
Hence, underwriting commission will be:
Issue
(Value) = 1,00,000 × 10 = images 10,00,000
2.5% on images 10,00,000 = images 25,000.
*2. No. of shares to be undertaken by Sure Shares & Co.:
No. of shares issued by the company: 1,00,000
No. of shares subscribed by the public: 70,000
Balance left out to be
undertaken by Sure Shares & Co. = 30,000 Shares
Value: 30,000 × images 10 = images 3,00,000
*3. Net commission payable to underwriter: (or)
Receipt of balance from underwriters after adjusting commission (As the case may be):
In this case, commission is less whereas his obligation to the company is more, that is, commission: only images 25,000 whereas his liability to the company is: obligation – commission, i.e., images 3,00,000 – images 25,000 = images 2,75,000
Books of ABC Ltd.
Journal Entries
images
Balance Sheet of ABC Ltd.
