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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Gujarat Steel Ltd issued 1,00,000 shares, underwritten by A (50%), B (30%) and C (20%). Applications received were 90,000 shares excluding firm underwriting. Marked applications were A 10,000, B 20,000 and C 5,000. B also had a firm underwriting of 7,500 shares. Unmarked applications are credited in the ratio of gross liability. Any surplus of an underwriter (credit more than liability) is allocated to the others in the ratio of their original underwriting. What is A's final liability under the agreement, excluding any firm shares?

A's final liability is 2,500 shares. Its liability after marked and unmarked credit is 12,500. B has a surplus of 14,000 after counting firm shares, which is shared 5:2 between A and C, so A absorbs 10,000. This leaves 2,500, matching the total unsubscribed shares.

  1. A12,500 shares
  2. B2,500 sharesCorrect
  3. C4,000 shares
  4. D10,000 shares

Explanation

Unmarked = 90,000 - 35,000 = 55,000, split 5:3:2 as 27,500, 16,500 and 11,000. A's credit is 37,500, leaving 12,500. B's credit is 20,000 + 16,500 + 7,500 = 44,000 against 30,000, a surplus of 14,000. C's credit is 16,000, leaving 4,000. Splitting B's surplus 5:2 gives A 10,000 and C 4,000. A's liability = 12,500 - 10,000 = 2,500 and C's is nil. Check: 100,000 - 90,000 - 7,500 = 2,500 unsubscribed.

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