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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Orion Ltd issued 1,00,000 shares of which 80,000 shares were underwritten (partial underwriting) by one underwriter and the remaining 20,000 shares were taken up by the promoters directly. The public applied for 70,000 shares, including 50,000 marked applications of the underwriter. The underwriting commission is 4% on Rs 10 shares issued at par. What is the commission payable to the underwriter on the shares underwritten?

Commission is Rs 32,000. Underwriting commission is calculated on the issue price of the shares underwritten, not on the shares actually subscribed by the public. Eighty thousand shares at Rs 10 give Rs 8,00,000, and 4% of this is Rs 32,000.

  1. ARs 32,000Correct
  2. BRs 28,000
  3. CRs 40,000
  4. DRs 20,000

Explanation

Commission is payable on the amount underwritten, irrespective of the shares actually subscribed. 80,000 x Rs 10 = Rs 8,00,000; 4% = Rs 32,000. Rs 28,000 wrongly uses the 70,000 applied shares; Rs 40,000 uses the full issue.

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