1

Employee Stock Option Plan

Solution 1
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.19 Employee Compensation Expense A/c Dr. 18,000
To Employee Stock Option Outstanding A/c 18,000
(Being compensation expenses recognised in respect of
500 option granted to employees at discount of ₹ 90
each, amortised on straight line basis over 2½ years)
31.03.19 Profit & Loss A/c Dr. 18,000
To Employee Compensation Expense A/c 18,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
31.03.20 Employee Compensation Expense A/c Dr. 18,000
To Employee Stock Option Outstanding A/c 18,000
(Being compensation expenses recognised in respect of
500 option granted to employees at discount of ₹ 90
each, amortised on straight line basis over 2½ years)
31.03.20 Profit & Loss A/c Dr. 18,000
To Employee Compensation Expense A/c 18,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
31.03.21 Employee Compensation Expense A/c Dr. 9,000
To Employee Stock Option Outstanding A/c 9,000
(Being compensation expenses recognised in respect of
500 option granted to employees at discount of ₹ 90
each, amortised on straight line basis over 2½ years)
31.03.21 Profit & Loss A/c Dr. 9,000
To Employee Compensation Expense A/c 9,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
30.06.21 Bank A/c Dr. 25,000
Employee Stock Option Outstanding A/c Dr. 45,000
To Equity Share Capital A/c 5,000
To Securities Premium A/c 65,000
(Being exercise of 500 stock option at a price of ₹ 50 per
share)
Notes:
1. Total employees compensation expenses = 500 x (₹140 - ₹50) = ₹45,000
2. Employees compensation expense has been written off during 2½ years on straight line basis as:
Ist Year = ₹ 18,000 (for full year)
IInd Year = ₹ 18,000 (for full year)
IIIrd Year = ₹ 9,000 (for half year)

Solution 2
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.19 Employee Compensation Expense A/c Dr. 88,000
To Employee Stock Option Outstanding A/c 88,000
(Being compensation expenses recognised in respect of
the employee stock option)
31.03.19 Profit & Loss A/c Dr. 88,000
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 2
To Employee Compensation Expense A/c 88,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
31.03.20 Employee Compensation Expense A/c Dr. 88,000
To Employee Stock Option Outstanding A/c 88,000
(Being compensation expenses recognised in respect of
the employee stock option)
31.03.20 Profit & Loss A/c Dr. 88,000
To Employee Compensation Expense A/c 88,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
31.03.21 Employee Stock Option Outstanding A/c Dr. 22,000
To General Reserve A/c 22,000
(Being excess of employees compensation expenses
transferred to general reserve account)
30.06.21 Bank A/c Dr. 72,000
Employee Stock Option Outstanding A/c Dr. 1,32,000
To Equity Share Capital A/c 12,000
To Securities Premium A/c 1,92,000
(Being 1,200 employee stock option exercised at an
exercise price of ₹ 60 each)
01.10.21 Employee Stock Option Outstanding A/c Dr. 22,000
To General Reserve A/c 22,000
(Being ESOS outstanding A/c on lapse of 200 options
at the end of exercise of option period transferred to
General Reserve A/c)
Working Notes:
1) Compensation expenses recognized in respect of the employee stock option:
2,000 options granted to employees at a discount of ₹ 110 each to be amortized on
Straight line basis over 2.5 years i.e. 2,000 stock options x ₹ 110 / 2.5 years = ₹ 88,000
2) On 31.3.2021, company will examine its actual forfeitures and make necessary adjustments, if any, to
reflect expenses for the number of options that actually vested. Considering that 1400 stock options
have completed 2.5 years vesting period, expense to be recognized during the year is in negative i.e.
No. of options actually vested 1,400 x 110 (170 – 60 = 110) ₹ 1,54,000
Less: Expenses recognized ₹ (88,000 + 88,000) (₹ 1,76,000)
Excess expense transferred to general reserve ₹ 22,000
3) Similarly, on 1.10.2021, Employee Stock Option Outstanding Account will be
No. of options actually vested (1,200 x 110) ₹ 1,32,000
Less: Expenses recognized (₹ 1,54,000)
Excess expense transferred to general reserve ₹ 22,000

Solution 3
Journal Entries
Date Particulars L.F. Dr. Cr.
15.03.21 Bank A/c (2500*40) Dr. 1,00,000
to Employee Compensation Expense A/c (2500*20) Dr. 50,000
31.03.21 To Equity Share Capital A/c (2500*10) 25,000
To Securities Premium A/c (2500*50) 1,25,000
(Being shares issued to employees against the options
vested to them in pursuance of Employee Stock Option
Plan)

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 3
31.03.21 Profit & Loss A/c Dr. 50,000
To Employee Compensation Expense A/c 50,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)

Solution 4
Journal Entries
Date Particulars L.F. Dr. Cr.
01.03.21 Bank A/c (102500*60) Dr. 61,50,000
to Employee Compensation Expense A/c (102500*90) Dr. 92,25,000
31.03.21 To Equity Share Capital A/c (102500*10) 10,25,000
To Securities Premium A/c (102500*140) 1,43,50,000
(Being shares issued to the employees against the
options vested to them in pursuance of Employee Stock
Option Plan)
31.03.21 Profit & Loss A/c Dr. 92,25,000
To Employee Compensation Expense A/c 92,25,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)

Solution 5
Journal Entries
Date Particulars L.F. Dr. Cr.
Bank A/c (2,400*50) Dr. 1,20,000
Employee Compensation Expense A/c (2,400*90) Dr. 2,16,000
01.10.20
To Equity Share Capital A/c (2,400*10) 24,000
to
To Securities Premium A/c (2,400*130) 3,12,000
31.03.21
(Being shares issued to the employees against the options
vested to them in pursuance of ESOP)
31.03.21 Profit & Loss A/c Dr. 2,16,000
To Employee Compensation Expense A/c 2,16,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
Working Note:
1. No entry is passed when stock options are granted to employees. Hence, no entry will be passed on 1st
August 2020;
2. Market Price = ₹ 140 per share and stock option price = ₹ 50, Hence, the difference ₹ 140 – ₹ 50 = ₹
90 per share is equivalent to employee cost or employee compensation expense and will be charged to
P &L Account as such for the number of options exercised i.e. 2,400 shares.

Solution 6
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.21 Bank A/c (60000*30) Dr. 18,00,000
Employee Compensation Expense A/c Dr. 4,80,000
To Equity Share Capital A/c (60000*10) 6,00,000
To Securities Premium A/c (60000*28) 16,80,000
(Being shares issued to the employees against the
options vested to them in pursuance of Employee Stock
Option Plan)
31.03.21 Profit & Loss A/c Dr. 4,80,000
To Employee Compensation Expense A/c 4,80,000
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 4
(Being transfer of employee compensation transfer to
Profit and Loss Account)
Working Note:
Fair value of an option = ₹ 38 – ₹ 30 = ₹ 8
Number of shares issued = 1,200 employees x 50 shares/employee = 60,000 shares
Fair value of ESOP which will be recognized as expenses in year 2020-21= 60,000 shares x 8 = 4,80,000
Vesting period = 1 year
Expenses recognized in 2020-2021 = ₹ 4,80,000

Solution 7
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.21 Bank A/c (90000*60) Dr. 54,00,000
Employee Compensation Expense A/c Dr. 6,30,000
To Equity Share Capital A/c (90000*10) 9,00,000
To Securities Premium A/c (90000*57) 51,30,000
(Being shares issued to the employees against the
options vested to them in pursuance of Employee Stock
Option Plan)
31.03.21 Profit & Loss A/c Dr. 6,30,000
To Employee Compensation Expense A/c 6,30,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
Working Note:
Fair value of an option = ₹ 67 – ₹ 60 = ₹ 7
Number of shares issued = 600 employees x 150 shares/employee = 90,000 shares
Fair value of ESOP which will be recognized as expenses in year 2020-21= 90,000 shares x 7 = 6,30,000
Vesting period = 1 year
Expenses recognized in 2020-2021 = ₹ 6,30,000

Solution 8
Computation of Employee Compensation Expense
Year No.of options expected Workings Cumulative expense Expense for the year
1 41,400 (55,200*75%) (41,400*12)*1/3 1,65,600 1,65,600
2 41,400 (41,400*12)*2/3 3,31,200 1,65,600
(3,31,200 - 1,65,600)
3 41,400 (41,400*12)*3/3 4,96,800 1,65,600
(4,96,800 - 3,31,200)
4,96,800

Solution 9
Calculation of ESOP cost to be amortized
2019-2020 2020-2021
Fair value of options per share 18 18
No. of options expected to vest under the scheme 93,000 88,000
(930 * 100) (880 * 100)
Fair value of options 16,74,000 15,84,000
Value of options recognized as expenses 8,37,000 7,47,000
(16,74,000/2) (15,84,000-8,37,000)

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 5
Solution 10
Journal Entries
Date Particulars L.F. Dr. Cr.
31.03.17 Employee Compensation Expense A/c Dr. 80,000
To Employee Stock Option Outstanding A/c 80,000
(Being compensation expenses recognised in respect of
8,000 option granted to employees at discount of ₹ 90
each, amortised on straight line basis over 4½ years)
31.03.17 Profit & Loss A/c Dr. 80,000
To Employee Compensation Expense A/c 80,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
31.03.18 Employee Compensation Expense A/c Dr. 1,60,000
To Employee Stock Option Outstanding A/c 1,60,000
(Being compensation expenses recognised in respect of
8,000 option granted to employees at discount of ₹ 90
each, amortised on straight line basis over 4½ years)
31.03.18 Profit & Loss A/c Dr. 1,60,000
To Employee Compensation Expense A/c 1,60,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
Employee Stock Option Outstanding A/c Dr. 40,000
To General Reserve A/c 40,000
31.03.19
(Being excess of employees compensation expenses
transferred to general reserve account)
Employee Compensation Expense A/c Dr. 80,000
To Employee Stock Option Outstanding A/c 80,000
31.03.20 (Being compensation expenses recognized in respect of
the ESOP i.e. 4,000 options at a discount of ₹ 90 each,
amortised on straight line basis over 4 ½ years)
31.03.20 Profit & Loss A/c Dr. 80,000
To Employee Compensation Expense A/c 80,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)
Employee Compensation Expense A/c Dr. 80,000
To Employee Stock Option Outstanding A/c 80,000
(Being compensation expenses recognized in respect of
31.03.21
the employee stock option i.e. 4,000 options at a
discount of ₹ 90 each, amortised on straight line basis
over 4 ½ years)
Profit & Loss A/c Dr. 80,000
To Employee Compensation Expense A/c 80,000
31.03.21
(Being transfer of employee compensation transfer to
Profit and Loss Account)
30.09.21 Bank A/c Dr. 2,40,000
Employee Stock Option Outstanding A/c Dr. 2,70,000
To Equity Share Capital A/c 30,000
To Securities Premium A/c 4,80,000
(Being exercise of 3,000 stock option at a price of ₹ 80
per share)
Employee Stock Option Outstanding A/c Dr. 90,000
30.09.21
To General Reserve 90,000
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 6
(Being ESOS outstanding A/c transferred to General
Reserve A/c on lapse of 1000 vested options at the end
of the exercise period)
Notes:
Computation of Employee Compensation Expense
Year No.of options Workings Cumulative Expense for the
expected expense year
16-17 8,000 (8,000*90)*0.5/4.5 80,000 80,000
17-18 8,000 (8,000*90)*1.5/4.5 2,40,000 1,60,000
18-19 4,000 (4,000*90)*2.5/4.5 2,00,000 (40,000)
19-20 4,000 (4,000*90)*3.5/4.5 2,80,000 80,000
20-21 4,000 (4,000*90)*4.5/4.5 3,60,000 80,000
3,60,000

Solution 11
Journal Entries
Date Particulars ₹ ₹
Employees Compensation Expense A/c Dr. 21,30,000
To Employee Stock Option outstanding A/c 21,30,000
(Being compensation expense recognized in respect of the
31.3.2019
ESOP i.e. 100 options each granted to 1,500 employees at a
discount of ₹ 30 each, amortised on straight line basis over
vesting years (Refer W.N.)
Profit and Loss A/c Dr. 21,30,000
31.3.2019 To Employees compensation expenses A/c 21,30,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation expenses A/c Dr. 5,90,000
To Employee Stock Option outstanding A/c 5,90,000
31.3.2020
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c Dr. 5,90,000
31.3.2020 To Employees compensation expenses A/c 5,90,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation Expenses A/c Dr. 12,40,000
To Employee Stock Option outstanding A/c 12,40,000
31.3.2021
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c 12,40,000
31.3.2021 To Employees compensation expenses A/c 12,40,000
(Being expenses transferred to profit and Loss A/c)
Bank A/c (1,250 x100 x40) Dr. 50,00,000
Employee Stock Option outstanding A/c Dr. 37,50,000
[(39,60,000 x 1,25,000/ 1,32,000]
2021-22 To Equity share capital (1250 x 100 x 10) 12,50,000
To Securities premium A/c [ (1250 x 100 x (70-10)] 75,00,000
(Being 1,25,000 options exercised at an exercise price of ₹ 40
each)
Employee Stock Option outstanding A/c Dr. 2,10,000
To General Reserve A/c 2,10,000
31.3.2022 (Being Employee Stock Option outstanding A/c on lapse of
7,000 options at the end of exercise of option period
transferred to General Reserve A/c)
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 7
Working Note:Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
2018-19 2019-20 2020-21
Number of options expected to vest* 1,42,000 options 1,36,000 options 1,32,000 options
Total compensation expense accrued
₹ 42,60,000 ₹ 40,80,000 ₹ 39,60,000
(70-40)
Compensation expense of the year 42,60,000 x 1/2 = ₹ 40,80,000 x 2/3 = ₹
₹ 39,60,000
21,30,000 27,20,000
Compensation expense recognized
Nil ₹ 21,30,000 ₹ 27,20,000
previously
Compensation expenses to be
₹ 21,30,000 ₹ 5,90,000 ₹ 12,40,000
recognized for the year
*It is assumed that each share is of ₹ 10 each and Lucky Ltd. expects all the options to be vested after
deducting actual lapses during the year.

Solution 12
Journal Entries
Date Particulars ₹ ₹
Employees Compensation Expense A/c Dr. 17,10,000
To Employee Stock Option outstanding A/c 17,10,000
(Being compensation expense recognized in respect of the
31.3.2019
ESOP i.e. 100 options each granted to 1,200 employees at a
discount of ₹ 30 each, amortised on straight line basis over
vesting years (Refer W.N.)
Profit and Loss A/c Dr. 17,10,000
31.3.2019 To Employees compensation expenses A/c 17,10,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation expenses A/c Dr. 4,70,000
To Employee Stock Option outstanding A/c 4,70,000
31.3.2020
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c Dr. 4,70,000
31.3.2020 To Employees compensation expenses A/c 4,70,000
(Being expenses transferred to profit and Loss A/c)
Employees compensation Expenses A/c Dr. 9,70,000
To Employee Stock Option outstanding A/c 9,70,000
31.3.2021
(Being compensation expense recognized in respect of the
ESOP- Refer W.N.)
Profit and Loss A/c 9,70,000
31.3.2021 To Employees compensation expenses A/c 9,70,000
(Being expenses transferred to profit and Loss A/c)
Bank A/c (1,00,000 x 30) Dr. 30,00,000
Employee Stock Option outstanding A/c Dr. 30,00,000
[(31,50,000 x 1,00,000/ 1,05,000]
2021-22
To Equity share capital (1,00,000 x 10) 10,00,000
To Securities premium A/c [ (1,00,000 x (60-10)] 50,00,000
(Being1,05,000options exercised at exercise price of 30 each)
Employee Stock Option outstanding A/c Dr. 1,50,000
To General Reserve A/c 1,50,000
31.3.2022 (Being Employee Stock Option outstanding A/c on lapse of
5,000 options at the end of exercise of option period
transferred to General Reserve A/c)
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 8
Working Note:
Statement showing compensation expense to be recognized at the end of:
Particulars Year 1 Year 2 Year 3
2018-19 2019-20 2020-21
Number of options expected to vest* 1,14,000 options 1,09,000 options 1,05,000 options
Total compensation expense accrued
₹ 34,20,000 ₹ 32,70,000 ₹ 31,50,000
(60-30)
Compensation expense of the year 34,20,000 x 1/2 = ₹ 32,70,000 x 2/3 = ₹
₹ 31,50,000
17,10,000 21,80,000
Compensation expense recognized
Nil ₹ 17,10,000 ₹ 21,80,000
previously
Compensation expenses to be
₹ 17,10,000 ₹ 4,70,000 ₹ 9,70,000
recognized for the year

Solution 13
Since the options granted have a graded vesting schedule, the enterprise segregates the total plan into
different groups, depending upon the vesting dates and treats each of these groups as a separate plan. The
enterprise determines the number of options expected to vest under each group as below:
Vesting Date Options expected
(Year-end) to vest
1 600 options x 1,000 employees x 25% x 0.97 1,45,500 options
2 600 options x 1,000 employees x 25% x 0.97 x 0.97 1,41,135 options
3 600 options x 1,000 employees x 50% x 0.97x 0.97 x 0.97 2,73,802 options
Total options expected to vest 5,60,437 options

In case of intrinsic value method, total compensation expense for the options expected to vest would be
Vesting Date Expected Vesting Value per Compensation
(End of year) (No. of Options) Option (₹) Expense (₹)
1 1,45,500 7 10,18,500
2 1,41,135 7 9,87,945
3 2,73,802 7 19,16,614
5,60,437 39,23,059

Total compensation expense of ₹ 39,23,059, determined at the grant date, would be attributed to the
years 1, 2 and 3 as below:
Vesting Date Cost to be recognized
(End of year)
Year 1 Year 2 Year 3
1 10,18,500 6,38,872
2 4,93,973* 4,93,972
3 6,38,871 6,38,871
Cost for the year 21,51,344 11,32,843 6,38,872
Cumulative cost 21,51,344 32,84,187 39,23,059
*Alternatively it may be rounded off as 4,93,972 in year 1 & 4,93,973 in year 2.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing