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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Kaveri Ltd offered 2,00,000 shares, fully underwritten by two underwriters: X for 1,20,000 shares and Y for 80,000 shares. Total applications received were 1,50,000 shares, of which 70,000 bore X's stamp, 40,000 bore Y's stamp and 40,000 were unmarked. Unmarked applications are distributed in the ratio of gross liabilities and marked applications are credited to respective underwriters. What is X's net liability in shares?

X's net liability is 26,000 shares. Gross liability of 1,20,000 is reduced by 70,000 marked applications and by X's 3/5 share of the 40,000 unmarked applications, which is 24,000. Y's net liability is 24,000, and together they take up the 50,000 unsubscribed shares.

  1. A26,000 sharesCorrect
  2. B50,000 shares
  3. C32,000 shares
  4. D24,000 shares

Explanation

Gross liability: X 1,20,000; Y 80,000. Less marked: X 50,000; Y 40,000. Balance after marked: X 50,000, Y 40,000. Standard approach: unmarked 40,000 split 3:2 gives X 24,000, Y 16,000. X net = 1,20,000 - 70,000 - 24,000 = 26,000. Check Y: 80,000-40,000-16,000=24,000. Total unissued = 50,000 = 2,00,000-1,50,000. Correct.

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