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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Arjun Textiles Ltd issued 1,00,000 equity shares of Rs 10 each at par and fully underwrote the issue with Mehta Brokers at 3% commission. The public subscribed all the shares, so the underwriter took up none. What is the journal entry for commission payable?

Commission of Rs 30,000 (3% of Rs 10,00,000) is payable even when the public subscribes fully. The entry debits underwriting commission and credits the underwriter, because commission is earned on the shares underwritten, not only on shares the underwriter takes up.

  1. AUnderwriting commission A/c Dr Rs 30,000 to Mehta Brokers A/c Rs 30,000Correct
  2. BUnderwriting commission A/c Dr Rs 30,000 to Equity share capital A/c Rs 30,000
  3. CNo entry, since the underwriter took up no shares
  4. DUnderwriting commission A/c Dr Rs 3,000 to Mehta Brokers A/c Rs 3,000

Explanation

Commission is payable on the total underwritten amount whether or not the underwriter subscribes. 1,00,000 x Rs 10 x 3% = Rs 30,000. It is debited to commission and credited to the underwriter. The no-entry option wrongly links commission to shares actually taken up.

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