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CMA Intermediate · Corporate Accounting and Auditing · Underwriting of Securities

Which journal entry correctly records underwriting commission of ₹40,000 payable to an underwriter on a share issue, under the usual Indian accounting treatment for a company that has shares issued in the same year?

The company debits Underwriting Commission Account and credits the Underwriter's account (or bank when paid). It is an expense of raising capital, creating a liability to the underwriter, and may later be written off against securities premium where permitted.

  1. ADebit Underwriting Commission A/c, Credit Underwriter's A/cCorrect
  2. BDebit Underwriter's A/c, Credit Underwriting Commission A/c
  3. CDebit Securities Premium A/c, Credit Bank A/c, without recording a liability
  4. DDebit Share Capital A/c, Credit Underwriter's A/c

Explanation

Commission is a company expense of issuing shares, so Underwriting Commission A/c is debited and the underwriter is credited as a liability until paid. It may then be adjusted against securities premium where permitted. Option 2 reverses the entry.

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