1

Employee Stock Option Plan

Solution 1
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 2
Journal Entries
Date Particulars L.F. Dr. Cr.
Bank A/c (3,600*30) Dr. 1,08,000
Employee Compensation Expense A/c (3,600*20) Dr. 72,000
15.03.21
To Equity Share Capital A/c (3,600*10) 36,000
to
To Securities Premium A/c (3,600*40) 1,44,000
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. 72,000
To Employee Compensation Expense A/c 72,000
(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
January 2021;
2. Market Price = ₹ 50 per share and stock option price = ₹ 30, Hence, the difference ₹ 50 – ₹ 30 = ₹ 20
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. 3,600 shares.

Solution 3
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)

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 2
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 4
Fair value of an option = ₹ 28
Difference between Fair value and Issue Price =₹ 28 – ₹ 25 = 3.
Number of employees accepting the offer = 400 employees x 50% = 200 employees
Number of shares issued = 200 employees x 100 shares/employee = 20,000 shares
Employee Compensation Expenses recognized in 2020-21 =20,000 shares x ₹ 3 = ₹ 60,000
Securities Premium A/c = ₹ 28 – 10 = ₹ 18 per share = 20,000 x 18 = ₹ 3,60,000

Journal Entries
Date Particulars L.F. Dr. Cr.
30.04.20 Bank A/c Dr. 5,00,000
Employee Compensation Expense A/c Dr. 60,000
To Equity Share Capital A/c 2,00,000
To Securities Premium A/c 3,60,000
(Being stock purchase option accepted by 200 employees
for 100 shares each at ₹ 25 per share on a Fair Value of ₹
28 per share)
31.03.21 Profit & Loss A/c Dr. 60,000
To Employee Compensation Expense A/c 60,000
(Being transfer of employee compensation transfer to
Profit and Loss Account)

Solution 5
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
(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

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 3
Solution 6
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 ESOP)
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 7
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
An enterprise should review all estimates taken in consideration for valuation of option. The value of
options recognized as expense in an accounting period is the excess of cumulative expense as per latest
estimates upto the current accounting period over the total expense recognized upto the previous
accounting period.

Solution 8
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)

Solution 9
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)
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 4
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
(Being compensation expenses recognized in respect of
31.03.20
the employee stock option 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
To General Reserve 90,000
30.09.21 (Being ESOS outstanding A/c transferred to General
Reserve A/c on lapse of 1000 vested options at the end
of the exercise period)

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 5
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 10
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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No part of these notes may be reproduced in any manner without his prior permission in writing
 6
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 exp (70-40) ₹ 42,60,000 ₹ 40,80,000 ₹ 39,60,000
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 exp recog. previously Nil ₹ 21,30,000 ₹ 27,20,000
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 11
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
(Being 1,05,000 options exercised at an 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)
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
 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* 1,14,000 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

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