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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Meru Ltd issued 1,00,000 shares of Rs 10 each at par, fully underwritten by P (50%), Q (30%) and R (20%). Total subscriptions were 80,000 shares, including marked applications of P 20,000, Q 18,000 and R 6,000; unmarked applications are 36,000. Applying the standard method, with unmarked applications distributed in the ratio of gross liabilities and any surplus of an underwriter being reallocated to others in the ratio of their remaining liabilities, what is R's net liability in shares?

R's net liability is 6,800 shares. After deducting R's 6,000 marked applications from the gross liability of 20,000, 14,000 remain. R's 2/10 share of the 36,000 unmarked applications is 7,200, leaving 6,800. Total net liabilities of all underwriters equal the 20,000 unsubscribed shares.

  1. A6,800 sharesCorrect
  2. B7,200 shares
  3. C6,000 shares
  4. D8,000 shares

Explanation

Gross: P 50,000; Q 30,000; R 20,000. Less marked: P 30,000; Q 12,000; R 14,000. Unmarked 36,000 in 5:3:2: P 18,000, Q 10,800, R 7,200. Net: P 12,000; Q 1,200; R 6,800. None negative. Total = 20,000 = 1,00,000-80,000. Correct.

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