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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Bharat Auto Ltd issued 1,00,000 shares, underwritten by A (60%) and B (40%). Applications received totalled 80,000 shares, excluding firm underwriting. These included marked applications of 20,000 (A) and 10,000 (B). A also had a firm underwriting of 5,000 shares. Unmarked applications are credited in the ratio of gross liability. How many shares in total will A finally hold on account of underwriting, including the firm shares?

A will hold 10,000 shares. A's gross liability is 60,000 shares, against which it is credited 20,000 marked, 30,000 as its 60% of the 50,000 unmarked applications, and 5,000 firm. That leaves 5,000 under the agreement, and adding the 5,000 firm shares gives 10,000.

  1. A5,000 shares
  2. B10,000 sharesCorrect
  3. C15,000 shares
  4. D20,000 shares

Explanation

Gross liability of A = 60,000. Unmarked applications = 80,000 - 30,000 = 50,000, of which A gets 60% = 30,000. A's credit = 20,000 marked + 30,000 unmarked + 5,000 firm = 55,000. Liability under the agreement = 5,000. Adding the 5,000 firm shares, A holds 10,000. The figure of 5,000 leaves out the firm shares.

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