ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

Accounting for Employee Stock Option Plans

EMPLOYEE STOCK OPTION PLAN [ESOP]

Q. 1 X Ltd. grants 1,250 options on 1st April, 2020 at Rs. 80 when the market price is Rs. 200
and the face value is Rs. 10. The vesting period is 3 years. The maximum exercise period is
one year. 450 unvested options lapse on 1st May, 2022, 700 options are exercised on 31st
August, 2023. Balance options lapsed on 31st August, 2023. Pass necessary journal entries.

Q. 2 The following particulars in respect of stock options granted by a company are

available:

Grant date April 1st, 2019

Number of employees covered 525
Number options granted per employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (Rs.) 100

Exercise price per share (Rs.) 125

Market price per share on grant date (Rs.) 149

Vesting date March 31, 2022
Exercise Date March 31, 2023
Fair value of option per share on grant date (Rs.) 30

Position on 31-03-20
(a) Estimated annual rate of departure 2%
(b) Number of employees left 15
Position on 31-03-21
(a) Estimated annual rate of departure 3%
(b) Number of employees left 10
Position on 31-03-22
(a) Number of employees left 8
(b) Number of employees entitled to exercise option 492
Position on 31-03-23
(a) Number of employees exercising the option 480
(b) Number of employees not exercising the option 12

Compute expenses to recognize in each year by (i) fair value method (ii) intrinsic value
method. Pass journal entries.

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ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

Q. 3 Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2019 for Rs.
20, depending upon the employees at the time of vesting of options. The market price of the
share is Rs. 50.

These options will vest at the end of year 1 if the earning of Choice Ltd. increases by 16%,
or it will vest at the end of the year 2 if the average earning of two years increases by 13%,
or lastly it will vest at the end of the third year if the average earning of 3 years will increase
by 10%.

5,000 unvested options lapsed on 31.3.2020, 4,000 unvested options lapsed on 31.3.2021
and finally 3,500 unvested options lapsed on 31.3.2022. Following is the earning of Choice
Ltd.:
Year ended on Earning (in %)
31.3.2020 14%
31.3.2021 10%
31.3.2022 7%

850 employees exercised their vested options within a year and remaining options were
unexercised at the end of the contractual life. Pass Journal entries for the above.

Q. 4 At the beginning of year 1, an enterprise grants 10,000 stock options to a senior

executive, conditional upon the executive remaining in the employment of the enterprise until
the end of year 3. The exercise price is Rs. 40. However, the exercise price drops to Rs. 30
if the earnings of the enterprise increase by at least an average of 10 per cent per year over
the three-year period.

On the grant date, the enterprise estimates that the fair value of the stock options, with an
exercise price of Rs. 30, is Rs. 16 per option. If the exercise price is Rs. 40, the enterprise
estimates that the stock options have a fair value of Rs. 12 per option.

During year 1, the earnings of the enterprise is 12 per cent, and the enterprise expects that
earnings will continue to increase at this rate over the next two years. The enterprise,
therefore, expects that the earnings target will be achieved, and hence the stock options will
have an exercise price of Rs. 30.

During year 2, the earnings of the enterprise is 13 per cent, and the enterprise continues to
expect that the earnings target will be achieved. During year 3, the earnings of the enterprise
is only 3 per cent, and therefore the earnings target was not achieved. The executive
completes three years’ service, and therefore satisfies the service condition.

Because the earnings target was not achieved, 10,000 vested stock options have an exercise
price of Rs. 40. Calculate the amount to be charged to Profit and Loss Account every year on
account of compensation expenses.

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ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

Q. 5 Siya Ltd. provides you the following information:

No. of employees 2,500

No. of option to be granted to each employee 500
Vesting period 4 Years
Fair value of the option per share Rs. 5

Exercise Price Rs. 50

Exercise Period 3 Years
Face value of each share Rs. 10

No. of employees not expected to fulfill the vesting

conditions other than market conditions
1st Year 20%
nd
2 Year 15%
rd
3 Year 10%
th
4 Year 10%

At the end of third year it has been re-estimated that all vesting conditions have been fulfilled
and no other further conditions are required for options to vest and 600 employees
exercise their option at the end of 4th year, 800 employees exercise their option at the end
of 5th year and 100 employees exercise their option at the end of 6th year. Rights of 30
employees expire unexercised at the end of the 6th year. You are required to pass necessary
journal entries for first 3 years.

EMPLOYEE STOCK PURCHASE PLAN [ESPP]

Q. 6 Y Ltd. issued 1,000 shares on 1st April, 2022 under ESPS at Rs.50 when the market price
is Rs.150 and the face value is Rs.10. Pass necessary journal entries.

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