# ASC 718-40-55: Compensation—Stock Compensation — Employee Stock Ownership Plans — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/718/40/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:9468a7d23a3c2880646579107847bf3e221d7f879924fd27c3875587c623a78b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 718-40-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/718/40/#55-implementation-guidance-and-illustrations) SEC content: no #### Illustrations ##### [718-40-55-1](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:408ad4a8958a075fba81cbe4171f2e8401688a04a73722236cbb41dde9b65fb9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Section contains illustrations of the requirements of this Subtopic for employers with [employee stock ownership plans](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan."). ##### [718-40-55-2](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-2) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:bc0caa40067a6e9fb0d302b0bcf433a73d5dc76f18d0fc56b5b7fbe794736075 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Examples do not address all possible circumstances that may arise in applying the guidance in this Subtopic. The Examples are for annual reporting periods and, accordingly, do not demonstrate the application of the Subtopic to interim financial statements. However, depending on the circumstances, many of the journal entries illustrated would be made for interim financial statements. ### Leveraged Employee Stock Ownership Plans ##### [718-40-55-3](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:879d81b8e9bfe5daa756cb3459fe27c322d6b77e73eac9b7cd54bf79f111b4b2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the guidance in paragraphs [718-40-25-7 through 25-17](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-7) ; [718-40-30-1 through 30-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-30-1) ; [718-40-35-1](https://asc.understandingaccounting.org/asc/718/40/#718-40-35-1); [718-40-40-1 through 40-7](https://asc.understandingaccounting.org/asc/718/40/#718-40-40-1) ; and [718-40-45-3 through 45-8](https://asc.understandingaccounting.org/asc/718/40/#718-40-45-3) : 1. a A common-stock leveraged [employee stock ownership plan](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan.") with a [direct loan](https://asc.understandingaccounting.org/glossary/d/#direct-loan "A direct loan is a loan made by a lender other than the employer to the employee stock ownership plan. Such loans often include some formal guarantee or commitment by the employer.") (Case A) 2. b A common-stock leveraged employee stock ownership plan used to fund the employer's match of a 401(k) savings plan with an [indirect loan](https://asc.understandingaccounting.org/glossary/i/#indirect-loan "An indirect loan is a loan made by the employer to the employee stock ownership plan, with a related outside loan to the employer.") (Case B) 3. c A convertible-preferred-stock leveraged employee stock ownership plan with a direct loan (Case C). ##### [718-40-55-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:5374bc566fb9b8ad6d91dacf040ba5696b85d1959bc0e611677a891669c941ae Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates a common stock leveraged employee stock ownership plan with a direct loan. This Case has the following assumptions: 1. a On January 1, Year 1, Entity A establishes a leveraged employee stock ownership plan. 2. b The employee stock ownership plan borrows $1,000,000 from an outside lender at 10 percent for 5 years and uses the proceeds to buy 100,000 shares of newly issued common stock of the sponsor for $10 per share, which is the market price of those shares on the date of issuance. 3. c Debt service is funded by cash contributions and dividends on employer stock held by the employee stock ownership plan. 4. d Dividends on all shares held by the employee stock ownership plan are used for debt service. 5. e Cash contributions are made at the end of each year. 6. f The year-end and average market values of a share of common stock follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-C3EAADED-A48F-4100-99D5-A7F4015A53A2-low.gif) Year Year-End Average 1 $11.50 $10.75 2 9.00 10.25 3 10.00 9.50 4 12.00 11.00 5 14.40 13.20 7. g The common stock pays normal dividends at the end of each quarter of 12.5 cents per share ($50,000 for the employee stock ownership plan's shares each year). Accordingly, in this Case, the average [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of shares is used to determine the number of shares used to satisfy the employers' obligation to replace dividends on [allocated shares](https://asc.understandingaccounting.org/glossary/a/#allocated-shares "Allocated shares are shares in an employee stock ownership plan trust that have been assigned to individual participant accounts based on a known formula. Internal Revenue Service (IRS) rules require allocations to be nondiscriminatory generally based on compensation, length of service, or a combination of both. For any particular participant such shares may be vested, unvested, or partially vested.") used for debt service. 8. h Principal and interest are payable in equal annual installments at the end of each year. Debt service is as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-1AEBAC17-A340-4E8A-A86E-94489DB1200F-low.gif) Year Principal Interest Total Debt Services 1 " $163,800 " " $100,000 " " $263,800 " 2 " 180,200 " " 83,600 " " 263,800 " 3 " 198,200 " " 65,600 " " 263,800 " 4 " 218,000 " " 45,800 " " 263,800 " 5 " 239,800 " " 24,000 " " 263,800 " " $1,000,000 " " $319,000 " " $1,319,000 " 9. i The number of shares released each year is as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-878B29F8-6EE3-4D96-973E-463AF2D4BEA5-low.gif) Year Dividends Compensation Total 1 0 "20,000" "20,000" 2 976 "19,024" "20,000" 3 "2,105" "17,895" "20,000" 4 "2,727" "17,273" "20,000" 5 "3,030" "16,970" "20,000" 10. j The number of shares released for dividends is determined by dividing the amount of dividends on allocated shares by the average fair value of a share of common stock (for Year 2: $10,000 divided by $10.25 equals 976 shares). In this illustration, the remaining shares are released for compensation (for Year 2: 20,000 less 976 equals 19,024 shares). 11. k Shares are released from the suspense account for allocation to participants' accounts based on a principal-plus-interest formula. The released shares are allocated to participant accounts the following year. Shares released and allocated follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-D23780D7-5229-4741-811F-A4B12E25FBEA-low.gif) Cumulative Number of Shares Average Shares Released Year-End Suspense Shares Year Released Allocated 1 " 20,000" 0 "10,000 " "80,000 " 2 " 40,000" "20,000 " "30,000 " "60,000 " 3 " 60,000" "40,000 " "50,000 " "40,000 " 4 " 80,000" "60,000 " "70,000 " "20,000 " 5 "100,000 " "80,000 " "90,000 " 0 12. l Income before employee stock ownership plan related charges is as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-8F5897DA-69EF-4A84-A5ED-0D4724ABFA7D-low.gif) Year Income 1 " $1,800,000 " 2 " 1,900,000 " 3 " 2,000,000 " 4 " 2,100,000 " 5 " 2,200,000 " 13. m All interest cost and compensation cost are charged to expense each year. 14. n Excluding employee stock ownership plan shares, 1,000,000 shares are outstanding on average each year. 15. o Entity A follows the guidance in Subtopic 740-10. 16. p Entity A's combined statutory tax rate is 40 percent each year. 17. q Entity A's only book-tax differences are those associated with its employee stock ownership plan. 18. r No valuation allowance is necessary for deferred tax assets. ##### [718-40-55-5](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:40dd6eaee4951631be9a83b9e90f6fb6cd18dccc55b4930ca604e0795c6cf872 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table sets forth Entity A's employee stock ownership plan-related information. All amounts represent changes (credits in parentheses) in account balances. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-2E4C30C4-FB17-4104-8FB6-BF647A0BABE7-low.gif) Year Principal Unearned Employee Stock Ownership Plan Shares Paid-In Capital Dividends Interest Expense Compensation Expense Cash Notes (1) (2) (3) (4) (1) (5) (6) 1 " $163,800 " " $(200,000)" " $(15,000)" $- " $100,000 " " $215,000 " " $(263,800)" 2 " 180,200 " " (200,000)" " (5,000)" " 10,000 " " 83,600 " " 195,000 " " (263,800)" 3 " 198,200 " " (200,000)" " 10,000 " " 20,000 " " 65,600 " " 170,000 " " (263,800)" 4 " 218,000 " " (200,000)" " (20,000)" " 30,000 " " 45,800 " " 190,000 " " (263,800)" 5 " 239,800 " " (200,000)" " (64,000)" " 40,000 " " 24,000 " " 224,000 " " (263,800)" Total " $1,000,000 " " $(1,000,000)" " $(94,000)" " $100,000 " " $319,000 " " $994,000 " " $(1,319,000)" Notes: (1) See the table in (h) of the preceding paragraph. (2) "Total number of shares released for year (20,000) multiplied by the cost per share to employee stock ownership plan ($10)." (3) "Total number of shares released for year (20,000) multiplied by the difference between average fair value per share (see the table in \[f\] of the preceding paragraph) and cost per share to employee stock ownership plan ($10). \[Year 1: 20,000 shares multiplied by ($10.75-$10.00)\]" (4) "Cumulative number of allocated shares (see the table in \[k\] of the preceding paragraph) multiplied by the dividend per share. \[Year 2: 20,000 shares multiplied by $.50\]" (5) Number of shares released for compensation (see the table in \[i\] of the preceding paragraph) multiplied by the average fair value per share for the period (see the table in \[f\] of the preceding paragraph). The amounts in this column have been rounded. (6) "The cash disbursed each year is comprised of $213,800 contribution and $50,000 in dividends." ##### [718-40-55-6](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:dd5c7121cb0af9c7d3c9cd9104e979dd259376401ab7a4b6b48b2ad3d71a84b3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity A would record journal entries from inception through Year 5 as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-414DA06D-0C83-40D1-833F-6B4E1F166986-low.gif) "January 1, Year 1 (inception)" Cash " $1,000,000 " Debt " $1,000,000 " \[To record the employee stock ownership plan's loan\] Unearned employee stock ownership plan shares (equity) " 1,000,000 " Common stock and paid-in capital " 1,000,000 " "\[To record the issuance of 100,000 shares to the employee stock ownership plan at $10 per share\]" Year 1 Interest expense " 100,000 " Accrued interest payable " 100,000 " \[To record interest expense\] Accrued interest payable " 100,000 " Debt " 163,800 " Cash " 263,800 " "\[To record debt payment (The cash disbursement of $263,800 consists of $50,000 in dividends, none of which is charged to retained earnings in Year 1, and $213,800 supplemental cash contribution to the employee stock ownership plan)\]" Compensation expense " 215,000 " Paid-in capital " 15,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 20,000 shares at an average fair value of $10.75 per share (shares cost employee stock ownership plan $10)\]" Deferred tax asset " 14,480 " Provision for income taxes " 600,000 " Income taxes payable " 614,480 " \[To record income taxes for Year 1\] - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-2615BBB3-E32B-4573-887C-875175FF8425-low.gif) Year 2 Interest expense " $83,600 " Accrued interest payable " $83,600 " \[To record interest expense\] Accrued interest payable " 83,600 " Debt " 180,200 " Cash " 263,800 " "\[To record debt payment (The cash disbursement of $263,800 consists of $50,000 in dividends, $10,000 of which is charged to retained earnings in Year 2, and $213,800 supplemental cash contribution to the employee stock ownership plan)\]" Retained earnings " 10,000 " Dividends payable " 10,000 " "\[To record declaration of $.50 per share dividend on the 20,000 allocated shares\]" Compensation expense " 195,000 " Dividends payable " 10,000 " Paid-in capital " 5,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 20,000 shares (19,024 for compensation and 976 for dividends) at an average fair value of $10.25 per share (shares cost employee stock ownership plan $10 per share)\]" Deferred tax asset " 7,920 " Provision for income taxes " 646,560 " Income taxes payable " 654,480 " \[To record income taxes for Year 2\] - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-B434B1C3-BC97-439D-A1C8-39FB8AE17406-low.gif) Year 3 Interest expense " $65,600 " Accrued interest payable " $65,600 " \[To record interest expense\] Accrued interest payable " 65,600 " Debt " 198,200 " Cash " 263,800 " \[To record debt payment\] Retained earnings " 20,000 " Dividends payable " 20,000 " "\[To record declaration of $.50 per share dividend on the 40,000 allocated shares\]" Compensation expense " 170,000 " Dividends payable " 20,000 " Paid-in capital " 10,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 20,000 shares (17,895 for compensation and 2,105 for dividends) at an average fair value of $9.50 per share (shares cost employee stock ownership plan $10 per share)\]" Deferred tax asset 720 Provision for income taxes " 697,760 " Paid-in capital " 4,000 " Income taxes payable " 694,480 " \[To record income taxes for Year 3\] - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-EB6966DD-9C57-415F-B997-65D90D9F94C4-low.gif) Year 4 Interest expense " $45,800 " Accrued interest payable " $45,800 " \[To record interest expense\] Accrued interest payable " 45,800 " Debt " 218,000 " Cash " 263,800 " \[To record debt payment\] Retained earnings " 30,000 " Dividends payable " 30,000 " "\[To record declaration of $.50 per share dividend on the 60,000 allocated shares\]" Compensation expense " 190,000 " Dividends payable " 30,000 " Paid-in capital " 20,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 20,000 shares (17,273 for compensation and 2,727 for dividends) at an average fair value of $11.00 per share (shares cost employee stock ownership plan $10 per share)\]" Provision for income taxes " 737,680 " Paid-in capital " 4,000 " Deferred tax asset " 7,200 " Income taxes payable " 734,480 " \[To record income taxes for Year 4\] - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-FB58BAED-74D2-4E9B-8B1D-82461EB1E902-low.gif) Year 5 Interest expense " $24,000 " Accrued interest payable " $24,000 " \[To record interest expense\] Accrued interest payable " 24,000 " Debt " 239,800 " Cash " 263,800 " \[To record debt payment\] Retained earnings " 40,000 " Dividends payable " 40,000 " "\[To record declaration of $.50 per share dividend on the 80,000 allocated shares\]" Compensation expense " 224,000 " Dividends payable " 40,000 " Paid-in capital " 64,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 20,000 shares (16,970 for compensation and 3,030 for dividends) at an average fair value of $13.20 per share (shares cost employee stock ownership plan $10 per share)\]" Provision for income taxes " 790,400 " Deferred tax asset " 15,920 " Income taxes payable " 774,480 " \[To record income taxes for Year 5\] ##### [718-40-55-7](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:519e311d36079f5fce00e06ed136d0dd4231189c45cc8c75acd866f0cb21cd4a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assuming Entity A terminates its employee stock ownership plan at the end of Year 2 (when the fair value of the [suspense shares](https://asc.understandingaccounting.org/glossary/s/#suspense-shares "The shares initially held by the employee stock ownership plan in a suspense account are called suspense shares. Suspense shares are shares that have not been released, committed to be released, or allocated to participant accounts. Suspense shares generally collateralize employee stock ownership plan debt.") is $540,000 \[60,000 shares multiplied by $9 per share\], the unearned employee stock ownership plan share balance is $600,000, and the unpaid debt balance is $656,000), and assuming the suspense shares are sold to pay down the debt, Entity A would make the following journal entry. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-D1C961F0-4005-47F1-8092-6626E4204A8C-low.gif) Debt " $656,000 " Additional paid-in capital " 60,000 " Unearned employee stock ownership plan shares " $600,000 " Cash " 116,000 " \[To record repayment of the employee stock ownership plan's loan and termination of the plan\] ##### [718-40-55-8](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:d40289922141fdfad409b6c4fc73f3ae8062e69c2985c8cd9a17b629a9b2d626 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following tables set forth Entity A's tax (assuming no termination) and earnings per share (EPS) computations. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-9D5C7EC1-D36D-41E7-AF4B-B838C81750AB-low.gif) Year 1 2 3 4 5 Income before employee stock ownership plan " $1,800,000 " " $1,900,000 " " $2,000,000 " " $2,100,000 " " $2,200,000 " Interest expense " (100,000)" " (83,600)" " (65,600)" " (45,800)" " (24,000)" Compensation expense " (215,000)" " (195,000)" " (170,000)" " (190,000)" " (224,000)" Pretax income " 1,485,000 " " 1,621,400 " " 1,764,400 " " 1,864,200 " " 1,952,000 " Provision for income tax Currently payable " 614,480 " " 654,480 " " 694,480 " " 734,480 " " 774,480 " Deferred " (14,480)" " (7,920)" (720) " 7,200 " " 15,920 " Total " 600,000 " " 646,560 " " 693,760 " " 741,680 " " 790,400 " Net income " $885,000 " " $974,840 " " $1,070,640 " " $1,122,520 " " $1,161,600 " Average shares outstanding " 1,010,000 " " 1,030,000 " " 1,050,000 " " 1,070,000 " " 1,090,000 " Earnings per share $.88 $.95 $1.02 $1.05 $1.07 - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-D80393C6-7960-4697-B711-3A850761EE32-low.gif) Year 1 2 3 4 5 Current provision: Income before employee stock ownership plan " $1,800,000 " " $1,900,000 " " $2,000,000 " " $2,100,000 " " $2,200,000 " Employee stock ownership plan contribution " (213,800)" " (213,800)" " (213,800)" " (213,800)" " (213,800)" Employee stock ownership plan dividends " (50,000)" " (50,000)" " (50,000)" " (50,000)" " (50,000)" Taxable income " 1,536,200 " " 1,636,200 " " 1,736,200 " " 1,836,200 " " 1,936,200 " Multiplied by 40 percent " $614,480 " " $654,480 " " $694,480 " " $734,480 " " $774,480 " Deferred provision: Reduction in unearned employee stock ownership plan shares for financial reporting " $200,000 " " $200,000 " " $200,000 " " $200,000 " " $200,000 " Related tax deduction (a) " 163,800 " " 180,200 " " 198,200 " " 218,800 " " 239,800 " Difference " (36,200)" " (19,800)" " (1,800)" " 18,000 " " 39,800 " Tax rate 40% 40% 40% 40% 40% Deferred tax expense ÷ (benefit) " $(14,480)" " $(7,920)" $ (720) " 7,200 " " 15,920 " (a) This amount is the principal repayment. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-84D4DAB7-A4AB-4EF8-BB7F-BDE599888B16-low.gif) Year 1 2 3 4 5 Pretax income " $1,485,000 " " $1,621,400 " " $1,764,400 " " $1,864,200 " " $1,952,000 " Tax at 40 percent (statutory rate) " 594,000 " " 648,560 " " 705,760 " " 745,680 " " 780,800 " Benefit of employee stock ownership plan dividends - " (4,000)" " (8,000)" " (12,000)" " (16,000)" Effect of difference between average fair value and cost of released shares " 6,000 " " 2,000 " - " 4,000 " " 25,600 " Provision as reported " $600,000 " " $646,560 " " $693,760 " " $741,680 " " $790,400 " ##### [718-40-55-9](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:9535e2ec7b88ac529755cbc5785040f0c671c0acc6ae4c41ebe31f67a94d63b0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The entity would provide the following disclosures for the end of Year 3. - The entity sponsors a leveraged employee stock ownership plan that covers all U.S. [employees](https://asc.understandingaccounting.org/glossary/e/#employee "An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, a grantee meets the definition of an employee if the grantor consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a grantor that classifies a grantee potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the grantee is a leased employee as described below). A grantee does not meet the definition of an employee solely because the grantor represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify a grantee as an employee for U.S. payroll tax purposes does not, by itself, indicate that the grantee is an employee because the grantee also must be an employee of the grantor under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant stock compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to those individuals for other services shall be accounted for as awards to nonemployees. (P) December 16, 2026; (N) December 16, 2026220-40-65-1An individual over whom a reporting entity exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (IRS) Revenue Ruling 87-41. A reporting entity based in a foreign jurisdiction would determine whether an employee-employer relationship exists based on the pertinent laws of that jurisdiction. Accordingly, an individual meets the definition of an employee if the reporting entity consistently represents that individual to be an employee under common law. The definition of an employee for payroll tax purposes under the U.S. Internal Revenue Code includes common law employees. Accordingly, a reporting entity that classifies an individual potentially subject to U.S. payroll taxes as an employee also must represent that individual as an employee for payroll tax purposes (unless the individual is a leased employee as described below). An individual that meets the definition of an employee includes, but is not limited to, a full-time, part-time, temporary, or seasonal employee. An individual does not meet the definition of an employee solely because the reporting entity represents that individual as an employee for some, but not all, purposes. For example, a requirement or decision to classify an individual as an employee for U.S. payroll tax purposes does not, by itself, indicate that the individual is an employee because the individual also must be an employee of the reporting entity under common law. A leased individual is deemed to be an employee of the lessee if all of the following requirements are met: The leased individual qualifies as a common law employee of the lessee, and the lessor is contractually required to remit payroll taxes on the compensation paid to the leased individual for the services provided to the lessee. The lessor and lessee agree in writing to all of the following conditions related to the leased individual: The lessee has the exclusive right to grant compensation to the individual for the employee service to the lessee. The lessee has a right to hire, fire, and control the activities of the individual. (The lessor also may have that right.) The lessee has the exclusive right to determine the economic value of the services performed by the individual (including wages and the number of units and value of stock compensation granted). The individual has the ability to participate in the lessee's employee benefit plans, if any, on the same basis as other comparable employees of the lessee. The lessee agrees to and remits to the lessor funds sufficient to cover the complete compensation, including all payroll taxes, of the individual on or before a contractually agreed upon date or dates. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer's shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards and other compensation granted to nonemployee directors for their services as directors. Awards granted and compensation paid to those individuals for other services shall be accounted for as awards and compensation to nonemployees.") who work 20 or more hours per week. The entity makes annual contributions to the employee stock ownership plan equal to the employee stock ownership plan's debt service less dividends received by the employee stock ownership plan. All dividends received by the employee stock ownership plan are used to pay debt service. The employee stock ownership plan shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. The entity accounts for its employee stock ownership plan in accordance with this Subtopic. Accordingly, the debt of the employee stock ownership plan is recorded as debt and the shares pledged as collateral are reported as unearned employee stock ownership plan shares in the statement of financial position. As shares are released from collateral, the entity reports compensation expense equal to the current market price of the shares, and the shares become outstanding for EPS computations. Dividends on allocated employee stock ownership plan shares are recorded as a reduction of retained earnings; dividends on unallocated employee stock ownership plan shares are recorded as a reduction of debt and accrued interest. Employee stock ownership plan compensation expense was $170,000, $195,000, and $215,000 for Years 3, 2, and 1, respectively. The employee stock ownership plan shares as of December 31 were as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-100A17B8-EC8D-4CA7-BD1E-EAECB6B1DF80-low.gif) Year 3 Year 2 Allocated shares "40,000 " "20,000 " Shares released for allocation "20,000 " "20,000 " Unreleased shares "40,000 " "60,000 " Total employee stock ownership plan shares "100,000 " "100,000 " Fair value of unreleased shares at December 31 " $400,000 " " $540,000 " ##### [718-40-55-10](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:1d7a0d01ba2b5e089d262ea21cdba7c7c13fa75b6b4b5c1d25a15dccb27e42e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates a common stock leveraged employee stock ownership plan used to fund the employer's match of a 401(k) savings plan with an indirect loan. On January 1, Year 1, Entity B established an employee stock ownership plan to fund the employer's match of its savings plan. All of the assumptions are the same as those outlined in Case A for Entity A, except as follows: 1. a Entity B loaned its employee stock ownership plan $1,000,000 and concurrently obtained a related loan. The terms of both lending arrangements are the same as for Case A's outside loan. 2. b Entity B uses shares released by the employee stock ownership plan to satisfy its matching obligation of 50 percent of voluntary employee contributions to the savings plan. The average fair value of the shares for each year is used to determine the number of shares necessary to satisfy the matching obligation. 3. c If the fair value of the shares released is less than Entity B's matching obligation, Entity B contributes additional newly issued shares to the employee stock ownership plan to satisfy the remaining obligation. 4. d Shares used to replace dividends on allocated shares used to service debt do not count toward the employer's match. 5. e The employee contributions, required employer match, and the number of shares needed to fund the employee match follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-D01F8A50-F9E0-48C0-A396-47AD67B88F1F-low.gif) Year Employee Contributions Employer Match Number of Shares 1 " $400,000 " " $200,000 " "18,605" 2 " 410,000 " " 205,000 " "20,000" 3 " 420,000 " " 210,000 " "22,105" 4 " 430,000 " " 215,000 " "19,545" 5 " 440,000 " " 220,000 " "16,667" Note that the number of shares needed to satisfy the employer's matching obligation is determined by dividing the matching obligation by the average fair value of a share of common stock (for Year 1: $200,000 divided by $10.75 \[see above table for average fair values\] equals 18,605 shares). ##### [718-40-55-11](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:7d0751f4ac26565031304fdb8522e3f4d837af02ae9ee91ece7c3c16974ca465 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The 20,000 shares released each year based on debt service payments follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-4403DFC7-8ED4-4C8B-854A-589F401BAB69-low.gif) Year Number of Shares Needed to Settle 401(k) Liability Total Employee Stock Ownership Plan Shares Released Employee Stock Ownership Plan Shares Used for Dividends Employee Stock Ownership Plan Shares Available to Settle 401(k) Liability Compensation (Additional Shares) Top-Up (Additional Shares) Notes (1) (2) (3) (4) (5) (6) 1 "18,605 " "20,000 " 0 "20,000 " "1,395 " 0 2 "20,000 " "20,000 " 976 "19,024 " 0 976 3 "22,105 " "20,000 " "2,105 " "17,895 " 0 "4,210 " 4 "19,545 " "20,000 " "2,727 " "17,273 " 0 "2,272 " 5 "16,667 " "20,000 " "3,030 " "16,970 " 303 0 Notes: (1) See the table in (e) of the preceding paragraph. (2) See assumptions. (3) See the table in paragraph 718-40-55-4(i). (4) Total employee stock ownership plan shares released minus employee stock ownership plan shares used for dividends. (5) "If the employee stock ownership plan shares needed to settle the 401(k) liability (column 1) are less than the employee stock ownership plan shares available to settle the liability (column 4), then the remaining shares are considered compensation (this is the case in Years 1 and 5)." (6) "If the employee stock ownership plan shares needed to settle the 401(k) liability (column 1) are greater than the employee stock ownership plan shares available to settle the liability (column 4), then the shortfall must be made up by the employer in the form of top-up shares (this is the case in Years 2, 3, and 4)." ##### [718-40-55-12](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:6bf11d939707a53d4e2d84d365e9ffeabc55f5b8721d11f1204538a50ddae10a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Cumulative share amounts follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-078023E3-D4DA-4FE1-B56C-3D6A0B5CFC5D-low.gif) Year Cumulative Number of Shares Total Suspense Shares Released Allocated 1 " 20,000" 0 "80,000" 2 " 40,976" "20,000" "60,000" 3 " 65,186" "40,976" "40,000" 4 " 87,458" "65,186" "20,000" 5 "107,458" "87,458" 0 ##### [718-40-55-13](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:ca9f1b7b48812a4bac9cabc3be47a2526cf36bc773c72b3737f8d19291952aea Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Note that dividends on [top-up shares](https://asc.understandingaccounting.org/glossary/t/#top-up-shares "Top-up shares are shares or cash that an employer contributes to an employee stock ownership plan because the fair value of the shares released is less than the employer's liability for a particular benefit, such as a savings plan match.") are paid in cash. Cumulative shares released include top-up shares. ##### [718-40-55-14](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:4c0041a953742b8aaf548ac2b1eed750af8a4112f426470636c2f2e30cea3b76 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table sets forth Entity B's employee stock ownership plan related information. All amounts represent changes (credits in parentheses) in account balances. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-23889585-C1B7-438D-B777-4F35DDE8109B-low.gif) Year Principal Unearned Employee Stock Ownership Plan Shares Paid-In Capital Dividends Interest Expense Compensation Expense Employee Stock Ownership Plan "Compensation Expense Top-Up" Cash Notes (1) (2) (3) (4) (1) (5) (6) (7) 1 " $ 163,800 " " $ (200,000) " " $(15,000) " $- " $100,000 " " $215,000 " $- " $(263,800) " 2 " 180,200 " " (200,000) " " (15,000) " " 10,000 " " 83,600 " " 195,000 " " 10,000 " " (263,800) " 3 " 198,200 " " (200,000) " " (30,000) " " 20,500 " " 65,600 " " 170,000 " " 40,000 " " (264,300) " 4 " 218,000 " " (200,000) " " (45,000) " " 32,600 " " 45,800 " " 190,000 " " 25,000 " " (266,400) " 5 " 239,800 " " (200,000) " " (64,000) " " 43,700 " " 24,000 " " 224,000 " - " (267,500)" Total " $1,000,000 " " $(1,000,000)" " $(169,000)" " $106,800 " " $319,000 " " $994,000 " " $75,000 " " $(1,325,800)" Notes: (1) See the table in paragraph 718-40-55-4(h). (2) "Number of shares released during the year (20,000) multiplied by the cost per share to employee stock ownership plan ($10)." (3) " Number of shares released during the year (20,000) multiplied by the difference between average fair value per share (see the table in paragraph 718-40-55-4\[f\]) and cost per share to the employee stock ownership plan ($10) plus the additional paid-in capital that arises from the top-up shares contributed, which equals the compensation expense related to the top-up." (4) Cumulative shares allocated (see the table in paragraph 718-40-55-12) multiplied by the dividend per share ($.50). (5) Number of employee stock ownership plan shares released for direct compensation plus number of shares released related to employer's match of 401(k) (see the table in paragraph 718-40-55-11) multiplied by the average fair value per share (see the table in paragraph 718-40-55-4\[f\]). (6) Additional shares contributed (top-up) to satisfy the 401(k) obligation (see the table in paragraph 718-40-55-11) multiplied by the fair value of shares contributed. (7) "The cash disbursed to the employee stock ownership plan each year is composed of $213,800 contribution; $50,000 in dividends on original employee stock ownership plan shares; and dividends on top-up shares of $500 in Year 3, $2,600 in Year 4, and $3,700 in Year 5." ##### [718-40-55-15](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:82027a03ed2212991418bba402fb08dfa874891d576fc8bae88d5925a724044b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity B would record journal entries from inception through Year 2 as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-2EB66016-AD14-47F0-BFE6-EBBF0877667B-low.gif) "January 1, Year 1 (inception)" Cash " $1,000,000 " Debt " $1,000,000 " \[To record loan\] Unearned employee stock ownership plan shares (equity) " 1,000,000 " Common stock and additional paid-in capital " 1,000,000 " "\[To record the issuance of 100,000 shares to the employee stock ownership plan at $10 per share\]" - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-5887F785-8F62-4628-AC71-518793C8205C-low.gif) Year 1 Interest expense " $100,000 " Accrued interest payable " $100,000 " \[To record interest expense\] Accrued interest payable " 100,000 " Debt " 163,800 " Cash " 263,800 " "\[To record debt payment (The cash disbursement of $263,800 consists of $50,000 in dividends, none of which was charged to retained earnings in Year 1, and $213,800 supplemental cash contribution to the employee stock ownership plan)\]" Compensation expense " 200,000 " 401(k) liability " 200,000 " "\[To record cost and liability related to employer's 401(k) match, which represents 50 percent of employee contributions\]" 401(k) liability " 200,000 " Compensation expense " 15,000 " Unearned employee stock ownership plan shares " 200,000 " Paid-in capital " 15,000 " "\[To record release of 20,000 shares at an average fair value of $10.75 per share, 18,605 shares are used to satisfy 401(k) liability and the remaining 1,395 are used to compensate participants directly (shares cost employee stock ownership plan $10 per share)\]" Deferred tax asset " 14,480 " Provision for income taxes " 600,000 " Income taxes payable " 614,480 " \[To record income taxes for Year 1 (See paragraphs 718-40-55-4 through 55-9 for detailed tax computation)\] - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-1155B269-E0BF-4956-BB10-2844D8FC1557-low.gif) Year 2 Interest expense " $83,600 " Accrued interest payable " $83,600 " \[To record interest expense\] Accrued interest payable " 83,600 " Debt " 180,200 " Cash " 263,800 " "\[To record debt payment (The cash disbursement of $263,800 consists of $50,000 in dividends, $10,000 of which was charged to retained earnings in year 2, and $213,800 supplemental cash contribution to the employee stock ownership plan)\]" Compensation expense " 205,000 " 401(k) liability " 205,000 " "\[To record cost and liability related to employer's 401(k) match, which represents 50 percent of employee contributions\]" Retained earnings " 10,000 " Dividends payable " 10,000 " "\[To record declaration of $.50 per share dividend on the 20,000 allocated shares\]" 401(k) liability " 205,000 " Dividends payable " 10,000 " Unearned employee stock ownership plan shares " 200,000 " Common stock/paid-in capital " 15,000 " "\[To record release of 20,000 shares plus contribution of an additional 976 shares to the employee stock ownership plan at an average fair value of $10.25 per share, 20,000 shares are used to satisfy 401(k) liability and the remaining 976 shares are used to replace dividends on allocated shares used for debt service (shares cost employee stock ownership plan $10 per share)\]" Deferred tax asset " 7,920 " Provision for income taxes " 642,560 " Income taxes payable " 650,480 " \[To record income taxes for Year 2 (see paragraphs 718-40-55-4 through 55-9 for detailed tax computation)\] ##### [718-40-55-16](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:0db6931ee18b017f6ccee5474bf0733b54746a5780542d3b886510959c3b84f7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Note that the journal entry differs from Case A because Entity B receives an additional $10,000 deduction ($4,000 tax benefit) for the 976 top-up shares. ##### [718-40-55-17](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:1689ebf9d02b85876f135692c64511167c0771bb6eb41113606371693647ef1a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Assuming Entity B terminated its employee stock ownership plan at the end of Year 4 (when the fair value of the suspense shares is $240,000, the unearned employee stock ownership plan shares balance is $200,000, and the unpaid debt balance is $239,800), and assuming the employer buys back the suspense shares in an amount equal to the debt balance, there will be 17 suspense shares left, which must be allocated to participants. (In this Case the shares are used to partially satisfy the employer's 401(k) matching obligation.) Entity B would make the following journal entry. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-4BB8557F-FFC9-4777-81E8-7D6937E9FDAE-low.gif) Treasury stock " $39,800 " 401(k) liability 204 Additional paid-in-capital " $40,004 " Unearned employee stock ownership plan shares " 200,000 " \[To record repurchase of employee stock ownership plan suspense shares and termination of the plan\] Debt " 239,800 " Cash " 239,800 " \[To record repayment of the employee stock ownership plan's loan\] ##### [718-40-55-18](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:2e11ecd58d96b8f991b0a1da60e10ebe35ffab1802b464111c1515cee910fc60 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In this Case, Entity B's taxes would be computed the same way as Case A. For Entity B the average number of employee stock ownership plan shares outstanding would be as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-20528AC1-A1B9-4AB0-A68B-044A1FB23B11-low.gif) Year Employee Stock Ownership Plan Shares Outstanding 1 "10,000" 2 "30,488" 3 "53,081" 4 "76,322" 5 "97,458" ##### [718-40-55-19](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:f5549275f5737f5318fc1dec46c4cb7d5c64e5892addf168897957613b1582fd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This represents the cumulative numbers of shares released at the beginning of the year plus the end of the year (see the table in the preceding paragraph) divided by 2. ##### [718-40-55-20](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:67599b28783ebf8323fbef311e1ac8c7ca274a4646034f9c9ee97acdb8b260cf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The entity would provide the following disclosures for the end of Year 3. - The entity sponsors a 401(k) savings plan under which eligible U.S. employees may choose to save up to 6 percent of salary income on a pretax basis, subject to certain Internal Revenue Service (IRS) limits. The entity matches 50 percent of employee contributions with entity common stock. The shares for this purpose are provided principally by the entity's employee stock ownership plan, supplemented as needed by newly issued shares. The entity makes annual contributions to the employee stock ownership plan equal to the employee stock ownership plan's debt service less dividends received by the employee stock ownership plan. All dividends received by the employee stock ownership plan are used to pay debt service. The employee stock ownership plan shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees who made 401(k) contributions that year, based on the proportion of debt service paid in the year. The entity accounts for its employee stock ownership plan in accordance with this Subtopic. Accordingly, the shares pledged as collateral are reported as unearned employee stock ownership plan shares in the statement of financial position. As shares are released from collateral, the entity reports compensation expense equal to the current market price of the shares, and the shares become outstanding for EPS computations. Dividends on allocated employee stock ownership plan shares are recorded as a reduction of retained earnings; dividends on unallocated employee stock ownership plan shares are recorded as a reduction of debt and accrued interest. - Compensation expense for the 401(k) match and the employee stock ownership plan was $210,000, $205,000, and $215,000 for Years 3, 2, and 1, respectively. The employee stock ownership plan shares as of December 31 were as follows. - ![](https://asc.understandingaccounting.org/asc-img/GUID-EE74F393-7269-4B99-819F-EBCBCFCCF400-low.gif) Year 3 Year 2 Allocated shares "40,976" "20,000" Shares released for allocation "24,210" "20,976" Unreleased shares " 40,000" " 60,000" Total employee stock ownership plan shares " 105,186" " 100,976" Fair value of unreleased shares at December 31 " $400,000 " " $540,000 " ##### [718-40-55-21](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:b9b273de2bb4604f2faf075eb65c0c0074ecd15d00f7e7c0dea3b588b867e671 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case illustrates a convertible preferred stock leveraged employee stock ownership plan with a direct loan. On January 1, Year 1, Entity D established an employee stock ownership plan with convertible preferred stock. The assumptions are as follows: 1. a The borrowing, debt service, earnings, and tax assumptions are the same as those for Entity A outlined in Case A. 2. b On January 1, Year 1, the employee stock ownership plan used the proceeds of the debt to buy 80,000 shares of newly issued convertible preferred stock of Entity D for $12.50 per share. 3. c The preferred stock pays dividends quarterly at an annual rate of $1.25 per share ($100,000 each year for the employee stock ownership plan shares). Accordingly, in this Case the average fair value of the shares is used to determine the number of shares used to satisfy the employer's obligation to replace dividends on allocated shares used for debt service. 4. d All dividends on employee stock ownership plan shares are used for debt service. 5. e The preferred stock is convertible into common stock at 1:1 ratio. 6. f Participants may not withdraw the convertible preferred stock from the employee stock ownership plan. When participants become eligible to withdraw shares from their account, they must either convert to common stock or redeem the preferred shares. 7. g The preferred stock has a guaranteed minimum redemption value of $12.50 per share, to be paid in shares of common stock. 8. h The preferred stock is callable at $13.00 per share. 9. i There is one vote per preferred share. 10. j The year-end and average fair values of a share of preferred stock (fair value is assumed to be greater than or equal to minimum value) follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-3BE8CBE3-08D4-4D03-A118-E4038F3347AA-low.gif) Year Year-End Average 1 $12.50 $12.50 2 12.50 12.50 3 12.50 12.50 4 12.50 12.50 5 14.40 13.20 ##### [718-40-55-22](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:05c1fbca1bbfd28921b5991446404474861c4221660d1439752def1ce2a64d86 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The shares released each year follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-F07324A3-F3D6-4809-9D62-AF1E7000BA52-low.gif) Year Dividends Compensation Total Released Total Allocated 1 0 "16,000" "16,000" 0 2 "1,600" "14,400" "16,000" "16,000" 3 "3,200" "12,800" "16,000" "16,000" 4 "4,800" "11,200" "16,000" "16,000" 5 "6,061" " 9,939" "16,000" "16,000" ##### [718-40-55-23](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:a983154f51ef3224ddb1d863f2b2ba8edf1f1f213c8ed39ad8690a2c459bccfa Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Note that the number of shares released for dividends is determined by dividing the amount of dividends on allocated shares (16,000 multiplied by $1.25 in Year 2; 32,000 multiplied by $1.25 in Year 3; and so forth) by the average fair value of a share of preferred stock ($12.50 in Years 2 and 3). In this illustration the remaining shares are released for compensation (16,000 less 1,600 in Year 2, 16,000 less 3,200 in Year 3, and so forth). ##### [718-40-55-24](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:e7e7202413deaf14ac50842f8b05ba250bdbea3e7577d0e2fc63dae606ca2c55 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Additional share information follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-739983A9-EE55-4EFF-9F59-18E9F49AE9F6-low.gif) Cumulative Number of Shares Year-End Suspense Shares Year Released Allocated 1 "16,000" 0 "64,000" 2 "32,000" "16,000" "48,000" 3 "48,000" "32,000" "32,000" 4 "64,000" "48,000" "16,000" 5 "80,000" "64,000" 0 ##### [718-40-55-25](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:daa895f4da1d94c25853adfffdc970fd0d5c011a3b3727dc1ed9accf65a40bdf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following chart sets forth Entity D's employee stock ownership plan related information. All amounts represent changes (credits in parentheses) in account balances. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-3F6FADE2-23A7-4403-9970-AAD22B5606AD-low.gif) Year Principal Unearned Employee Stock Ownership Plan Shares Paid-In Capital Dividends Interest Expense Compensation Expense Cash Notes (1) (2) (3) (4) (1) (5) (6) 1 " $163,800 " " $(200,000)" $- $- " $100,000 " " $200,000 " " $(263,800)" 2 " 180,200 " " (200,000)" - " 20,000 " " 83,600 " " 180,000 " " (263,800)" 3 " 198,200 " " (200,000)" - " 40,000 " " 65,600 " " 160,000 " " (263,800)" 4 " 218,000 " " (200,000)" - " 60,000 " " 45,800 " " 140,000 " " (263,800)" 5 " 239,800 " " (200,000)" " (11,200)" " 80,000 " " 24,000 " " 131,200 " " (263,800)" Total "$1,000,000 " " $(1,000,000)" " $(11,200)" " $200,000 " " $319,000 " " $881,200 " " $(1,319,000)" Notes: (1) See the table in paragraph 718-40-55-4(h). (2) "Total number of shares released during the year (16,000) multiplied by the cost per share to employee stock ownership plan ($12.50)." (3) "Total number of shares released during the year (16,000) multiplied by the difference between average fair value per share at the release date (see the table in paragraph 718-40-55-21\[j\]) and cost-per-share to the employee stock ownership plan ($12.50)." (4) Cumulative shares allocated (see the table in the preceding paragraph) multiplied by the dividend per share ($1.25). (5) Total number of employee stock ownership plan shares released for compensation (see the table in paragraph 718-40-55-22) multiplied by the average fair value per share to employee stock ownership plan (see the table in paragraph 718-40-55-21\[j\]). (6) "The cash disbursed each year is composed of $163,800 in contributions and $100,000 in dividends." ##### [718-40-55-26](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:4d7b274ecaa7384b6053b9b495aec64f0c395016f73f5ca3d2348ba749be3bea Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The journal entries to reflect the accounting for Entity D's employee stock ownership plan from inception through Year 2 are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-04CA344C-882B-4871-A3C2-6166C9F955DB-low.gif) Cash " $1,000,000 " Debt " $1,000,000 " \[To record the employee stock ownership plan's loan\] Unearned employee stock ownership plan shares (equity) " 1,000,000 " Preferred stock " 1,000,000 " \[To record the issuance of shares to the employee stock ownership plan\] Year 1 Interest expense " 100,000 " Accrued interest payable " 100,000 " \[To record interest expense\] Accrued interest payable " 100,000 " Debt " 163,800 " Cash " 263,800 " "\[To record debt payment (the cash disbursement of $263,800 consists of $100,000 in dividends, none of which was charged to retained earnings in Year 1, and $163,800 supplemental cash contribution to the employee stock ownership plan)\]" Compensation expense " 200,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 16,000 shares at an average fair value of $12.50 per share (shares cost employee stock ownership plan $12.50 per share)\]" Deferred tax asset " 14,480 " Provision for income taxes " 600,000 " Income taxes payable " 614,480 " \[To record income taxes for year\] Year 2 Interest expense " 83,600 " Accrued interest payable " 83,600 " \[To record interest expense\] Accrued interest payable " 83,600 " Debt " 180,200 " Cash " 263,800 " "\[To record debt payment (the cash disbursement of $263,800 is made up of $100,000 in dividends, $20,000 of which was charged to retained earnings in Year 2, and $163,800 supplemental cash contribution to the employee stock ownership plan)\]" Retained earnings " 20,000 " Dividends payable " 20,000 " "\[To record declaration of $1.25 per share dividend on the 16,000 allocated shares\]" Compensation expense " 180,000 " Dividends payable " 20,000 " Unearned employee stock ownership plan shares " 200,000 " "\[To record release of 16,000 shares at an average fair value of 12.50 per share (shares cost employee stock ownership plan $12.50 per share)\]" Deferred tax asset " 7,920 " Provision for income taxes " 646,560 " Income taxes payable " 654,480 " \[To record income taxes for year\] ##### [718-40-55-27](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:1b00d364b4494e94830b8cd26d06f39b56103621985c820d878f194f2cd6381f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax and EPS calculations for Entity D follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-568C4491-ED4C-483E-834F-15C3AF13D434-low.gif) Year 1 2 3 4 5 Income before employee stock ownership plan " $1,800,000 " " $1,900,000 " " $2,000,000 " " $2,100,000 " " $2,200,000 " Interest expense " (100,000)" " (83,600)" " (65,600)" " (45,800)" " (24,000)" Compensation expense " (200,000)" " (180,000)" " (160,000)" " (140,000)" " (131,200)" Pretax income " 1,500,000 " " 1,636,400 " " 1,774,400 " " 1,914,200 " " 2,044,800 " Provision for income tax Currently payable " 614,480 " " 654,480 " " 694,480 " " 734,480 " " 774,480 " Deferred " (14,480) " " (7,920) " (720) " 7,200 " " 15,920 " Total " $600,000 " " $646,560 " " $693,760 " " $741,680 " " $790,400 " Net income " $900,000 " " $989,840 " " $1,080,640 " " $1,172,520 " " $1,254,400 " Preferred stock dividends - " 20,000 " " 40,000 " " 60,000 " " 80,000 " Earnings applicable to common stock " $900,000 " " $969,840 " " $1,040,640 " " $1,112,520 " " $1,174,400 " Common shares outstanding " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " Basic EPS without conversion $ .90 $ .97 $ 1.04 $ 1.11 $ 1.17 Diluted EPS if converted $ .89 $ .95 $ 1.01 $ 1.07 $ 1.13 ##### [718-40-55-28](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:20f24bb5a60d2678851d3b48a88548a34593a004126ff6c072de93f09f277060 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If-converted computation. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-65F75C4B-1B65-4950-BA58-D1099A9AF605-low.gif) Year 1 2 3 4 5 Earnings applicable to common stock " $900,000 " " $969,840 " " $1,040,640 " " $1,112,520 " " $1,174,400 " Add— Preferred dividends net of tax - " 12,000 " " 24,000 " " 36,000 " " 48,000 " Tax benefit on as if converted common dividend (1) - " 3,902 " " 8,421 " " 10,909 " " 12,800 " Less— Additional compensation (2) - " (6,146) " " (11,368) " " (19,636) " " (28,800) " Adjusted earnings " $900,000 " " $979,596 " " $1,061,693 " " $1,139,793 " " $1,206,400 " Shares outstanding Non-employee stock ownership plan " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " Employee stock ownership plan as if converted (3) " 9,302 " " 29,268 " " 52,632 " " 63,636 " " 72,000 " Total " 1,009,302 " " 1,029,268 " " 1,052,632 " " 1,063,636 " " 1,072,000 " If-converted diluted EPS $ .89 $ .95 $ 1.01 $ 1.07 $ 1.13 ##### [718-40-55-29](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:9e0296d4c6c477df106fb774bb68aa1b7bcffc7cb3bada467bcd48c242845757 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Computations for (1), (2), and (3) follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-3739D489-C877-438A-9F9F-77B2CD770427-low.gif) Year 1 2 3 4 5 (1) Allocated preferred shares 0 "16,000" "32,000" "48,000" "64,000" Conversion ratio 1:1 1:1 1:1 1:1 1:1 Redemption ratio 12.50/10.75 12.50/10.25 12.50/9.50 12.50/11.00 1:1 If converted allocated common shares 0 "19,512" "42,105" "54,545" "64,000" Dividends at $.50 per common share $- " $9,756 " " $21,053 " " $27,273 " " $32,000 " Tax benefit on common dividends $- " $3,902 " " $8,421 " " $10,909 " " $12,800 " (2) Preferred dividends at $1.25 per share $- " $20,000 " " $40,000 " " $60,000 " " $80,000 " Dividends at $.50 per common share $- " (9,756) " " (21,053)" " (27,273) " " (32,000) " Additional compensation gross $- " $10,244 " " $18,947 " " $32,727 " " $48,000 " Net of tax $- " $6,146 " " $11,368 " " $19,636 " " $28,800 " (3) Computation average preferred shares released "8,000" "24,000" "40,000" "56,000" "72,000" Conversion ratio 1:1 1:1 1:1 1:1 1:1 Redemption ratio 12.50/10.75 12.50/10.25 12.50/9.50 12.50/11.00 1:1 If converted average released common shares "9,302" "29,268" "52,632" "63,636" "72,000" - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-549BF9CF-3CBD-40E9-B30F-B70A52E53985-low.gif) Year 1 2 3 4 5 Pretax income " $1,500,000 " " $1,636,400 " " $1,774,400 " " $1,914,200 " " $2,044,800 " Tax at 40 percent (statutory rate) " $600,000 " " $654,560 " " $709,760 " " $765,680 " " $817,920 " Benefit of employee stock ownership plan dividends - " (8,000)" " (16,000)" " (24,000)" " (32,000)" Effect of difference between fair value and cost of released shares - - - - " 4,480 " Provision as reported " $600,000 " " $646,560 " " $693,760 " " $741,680 " " $790,400 " ##### [718-40-55-30](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:a0deb81cc52ce29ebd89858cf70694cda8b34e27c867810caf450a4ac8c0ca35 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [718-40-25-7 through 25-17](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-7) ; [718-40-30-1 through 30-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-30-1) ; [718-40-35-1](https://asc.understandingaccounting.org/asc/718/40/#718-40-35-1); [718-40-40-1 through 40-7](https://asc.understandingaccounting.org/asc/718/40/#718-40-40-1) ; and [718-40-45-3 through 45-8](https://asc.understandingaccounting.org/asc/718/40/#718-40-45-3) for a convertible preferred stock leveraged employee stock ownership plan used to fund a 401(k) savings plan with an [employer loan](https://asc.understandingaccounting.org/glossary/e/#employer-loan "An employer loan is a loan made by the employer to the employee stock ownership plan, with no related outside loan."). This Example has the following assumptions: 1. a On January 1, Year 1, Entity E established a leveraged employee stock ownership plan with convertible preferred stock. 2. b The employee stock ownership plan borrowed $1,000,000 from the employer at 10 percent for 5 years and used the proceeds to buy 80,000 shares of newly issued convertible preferred stock of Entity E for $12.50 per share. 3. c Debt service is funded by cash contributions and dividends on employer stock held by the employee stock ownership plan. 4. d Dividends on all of the original 80,000 shares held by the employee stock ownership plan are used for debt service. 5. e Cash contributions are made at the end of each year. 6. f The preferred stock pays dividends quarterly at an annual rate of $1.25 per share ($100,000 each year for the employee stock ownership plan's shares). Accordingly, in this Example, the average fair value of the shares is used to determine the number of shares used to satisfy the employer's obligation to replace dividends on allocated shares used for debt service. 7. g The preferred stock is convertible at a 1:1 ratio into common stock. 8. h Participants may not withdraw the convertible preferred stock from the employee stock ownership plan. When participants become eligible to withdraw shares from their account, they must either convert to common stock or redeem the preferred shares. 9. i The preferred stock has a guaranteed minimum redemption value of $12.50 per share, to be paid in shares of common stock. 10. j The preferred stock is callable at $13.00 per share. 11. k There is one vote per preferred share. 12. l The year-end and average fair values of a share of preferred stock (fair value is assumed to be greater than or equal to minimum value) follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-0F813EB6-7359-4C28-8949-7C2AB2C05D0A-low.gif) Year Year-End Average 1 $12.50 $12.50 2 12.50 12.50 3 12.50 12.50 4 12.50 12.50 5 14.40 13.20 13. m Entity E uses shares released by the employee stock ownership plan to satisfy its matching obligation of 50 percent of voluntary employee contributions to the savings plan. The fair value of the shares at the end of each month is used to determine the number of shares necessary to satisfy the matching obligation. (Accordingly, in this Example, average fair values are used to determine the number of shares needed to satisfy the employer's liabilities.) 14. n If the fair value of the shares released is less than Entity E's matching obligation, Entity E contributes additional newly issued shares (top-up shares) to the employee stock ownership plan to satisfy the remaining obligation. The top-up shares are issued at the end of the year. Dividends on the top-up shares are paid in cash. 15. o Shares that replace dividends on allocated shares used to service debt do not count toward the employer's match. 16. p The employee contributions, required employer match, and the number of shares needed to fund the employee match follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-9EEA5F6F-5555-4619-B74C-4C4135E13CD9-low.gif) Year Employee Contributions Employer Match Number of Shares 1 " $400,000 " " $200,000 " "16,000" 2 " 410,000 " " 205,000 " "16,400" 3 " 420,000 " " 210,000 " "16,800" 4 " 430,000 " " 215,000 " "17,200" 5 " 440,000 " " 220,000 " "16,667" Note that the number of shares needed to satisfy the employer's matching obligation is determined by dividing the matching obligation by the average fair value of a share of common stock (for Year 1: $200,000 divided by $12.50 equals 16,000 shares). 17. q Principal and interest are payable in annual installments at the end of each year. Debt service is as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-D4CAEF5E-A3CE-4ED7-B200-9E22153AA971-low.gif) Year Principal Interest Total Debt Service 1 " $ 110,000 " " $ 100,000 " " $ 210,000 " 2 " 150,000 " " 89,000 " " 239,000 " 3 " 200,000 " " 74,000 " " 274,000 " 4 " 250,000 " " 54,000 " " 304,000 " 5 " 290,000 " " 29,000 " " 319,000 " Total " $1,000,000 " " $346,000 " " $1,346,000 " 18. r Shares are released from the suspense account for allocation to participants' accounts based on a principal-plus-interest formula. The released shares are allocated to participants' accounts at the beginning of the following year. Shares are assumed to be released ratably throughout the year. 19. s The shares released each year follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-110CF362-687F-4505-81B0-5A8361C4A87D-low.gif) Year Number of Shares Needed to Satisfy 401(k) Liability Total Released Shares Released for Dividends Employee Stock Ownership Plan Shares Available to Satisfy 401(k) Liability Additional Shares (Top-Up) 1 "16,000" "12,481" 0 "12,481" "3,519" 2 "16,400" "14,205" 1248 "12,957" "3,443" 3 "16,800" "16,286" 2669 "13,617" "3,183" 4 "17,200" "18,068" 4297 "13,771" "3,429" 5 "16,667" "18,960" 5780 "13,180" "3,487" Note that the number of shares released for dividends is determined by dividing the amount of dividends on allocated shares (12,481 multiplied by $1.25 in Year 2; 26,686 multiplied by $1.25 in Year 3, and so forth) by the average fair value of a share of preferred stock ($12.50 in Years 2 and 3). In this example, the remaining shares are released for compensation (14,205 less 1,248 in Year 2; 16,286 less 2,669 in Year 3, and so forth). 20. t Additional share information follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-3FD6FEDC-793C-49C0-8FF4-7A6F13269248-low.gif) Initial Employee Stock Ownership Plan Shares Top-Up Shares Average Shares Released or Issuable Total Shares Allocated Year-End Suspense Shares Cumulative Shares Cumulative Shares Year Released Allocated Issuable Issued 1 "12,481" 0 " 3,519" 0 " 8,000" 0 "67,519" 2 "26,686" "12,481" " 6,962" " 3,519" "24,824" "16,000" "53,314" 3 "42,972" "26,686" "10,145" " 6,962" "43,383" "33,648" "37,028" 4 "61,040" "42,972" "13,574" 10145 "63,866" "53,117" "18,960" 5 "80,000" "61,040" "17,061" 13574 "85,838" "74,614" 0 21. u The pre-employee stock ownership plan income, shares outstanding, and income tax assumptions are the same as for Example 1 (see paragraph [718-40-55-3](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-3)). ##### [718-40-55-31](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:c9489502b6eab9ea82372ab8b68b04073b94ca80168786b15344e78ed26e2a52 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following chart sets forth Entity E's employee stock ownership plan related information. All amounts represent changes (credits are in parentheses) in account balances. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-52C7D713-CB86-4D55-9A00-3608659DF723-low.gif) Year Unearned Employee Stock Ownership Plan Shares Paid-In Capital Dividends— Original Shares Dividends Top-Up Shares Compensation Expense Employee Stock Ownership Plan Compensation Expense Top-Up Notes (1) (2) (3) (4) (5) (6) 1 " $(156,000)" " $(44,000)" $- $- " $156,000 " " $44,000 " 2 " (177,600)" " (43,000)" " 15,600 " " 4,400 " " 162,000 " " 43,000 " 3 " (203,600)" " (39,800)" " 33,400 " " 8,700 " " 170,200 " " 39,800 " 4 " (225,800)" " (42,900)" " 53,700 " " 12,700 " " 172,100 " " 42,900 " 5 " (237,000) " " (59,300) " " 76,300 " " 17,000 " " 174,000 " " 46,000 " Total " $(1,000,000)" " $(229,000)" " $179,000 " " $42,800 " " $834,300 " " $215,700 " Notes: (1) Total number of shares released during the year multiplied by the cost per share to employee stock ownership plan ($12.50). (2) "Total number of shares released during the year multiplied by the difference between average fair value per share at the release date (see the table in \[l\] of the preceding paragraph) and cost per share to the employee stock ownership plan ($12.50) plus the additional paid-in capital that arises from the top-up shares contributed, which equals the compensation expense related to the employee stock ownership plan." (3) "Cumulative shares allocated from original 80,000 shares (see the table in \[t\] of the preceding paragraph) multiplied by the dividend per share ($1.25)." (4) Cumulative top-up shares issued (see the table in \[t\] of the preceding paragraph) multiplied by the dividend per share ($1.25). (5) Total number of employee stock ownership plan shares released for compensation (see the table in \[s\] of the preceding paragraph) multiplied by the average fair value per share (see the table in \[l\] of the preceding paragraph). (6) Top-up shares (see the table in \[s\] of the preceding paragraph) multiplied by the average fair value per share (see the table in \[l\] of the preceding paragraph). ##### [718-40-55-32](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:67232a54f6c20bd7679f672a6f2f74054878e04333254103250d262d844e4cfb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The journal entries to reflect the accounting for Entity E's employee stock ownership plan from inception through Year 2 are as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-22322633-B25F-4AB5-B406-7FEB50AEBFD2-low.gif) Unearned employee stock ownership plan shares (equity) " $1,000,000 " Preferred stock " $1,000,000 " \[To record the issuance of shares to the employee stock ownership plan\] Year 1 Compensation expense " 200,000 " 401(k) liability " 200,000 " \[To record cost and liability related to 401(k) match\] 401(k) liability " 200,000 " Preferred stock " 44,000 " Unearned employee stock ownership plan shares " 156,000 " "\[To record release of 12,481 shares at an average fair value of $12.50 per share (shares cost employee stock ownership plan $12.50 per share) and issuance of 3,519 additional shares at $12.50 per share for top-up\]" Deferred tax asset " 18,400 " Provision for income taxes " 600,000 " Income tax payable " 618,400 " \[To record income taxes for Year 1\] Year 2 Retained earnings " 15,600 " Dividends payable " 15,600 " "\[To record declaration of $1.25 per share dividend on the 12,481 allocated shares\]" Retained earnings " 4,400 " Cash " 4,400 " "\[To record declaration and payment of $1.25 per share dividend on the 3,519 issued top-up shares\]" Compensation expense " 205,000 " 401(k) liability " 205,000 " \[To record cost and liability related to 401(k) match\] 401(k) liability " 205,000 " Dividends payable " 15,600 " Unearned employee stock ownership plan shares " 177,600 " Preferred stock " 43,000 " "\[To record release of 14,205 shares at an average fair value of $12.50 per share (shares cost employee stock ownership plan $12.50 per share) and issuance of 3,443 additional shares at $12.50 per share for top-up\]" Deferred tax asset " 11,040 " Provision for income taxes " 636,160 " Income tax payable " 647,200 " \[To record income taxes for Year 1\] ##### [718-40-55-33](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:78ef8598e543601bef0a4b0bc55249e420b2f678a864e312199e85544eb5696a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The tax and earnings per share (EPS) computations for Entity E follow. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-AD61BC46-2E97-4977-AFA4-89E4873AB9B8-low.gif) Year 1 2 3 4 5 Income before employee stock ownership plan " $1,800,000 " " $1,900,000 " " $2,000,000 " " $2,100,000 " " $2,200,000 " Interest expense " 100,000 " " 89,000 " " 74,000 " " 54,000 " " 29,000 " Compensation—employee stock ownership plan " 156,000 " " 162,000 " " 170,200 " " 172,100 " " 174,000 " Compensation—top-up " 44,000 " " 43,000 " " 39,800 " " 42,900 " " 46,000 " Pretax income " 1,500,000 " " 1,606,000 " " 1,716,000 " " 1,831,000 " " 1,951,000 " Provision for income tax Currently payable " 647,200 " " 674,480 " " 701,240 " " 734,000 " Deferred " (18,400)" " (11,040)" " (1,440)" " 9,680 " " 21,200 " Total " 600,000 " " 636,160 " " 673,040 " " 710,000 " " 755,200 " Net income " 900,000 " " 969,840 " " 1,042,960 " " 1,120,080 " " 1,195,800 " Preferred stock dividends - " 20,000 " " 42,100 " " 66,400 " " 93,300 " Earnings applicable to common stock " $900,000 " " $949,840 " " $1,000,860 " " $1,053,680 " " $1,102,500 " Common shares outstanding " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " Basic EPS without conversion $0.90 $0.95 $1.00 $1.05 $1.10 Diluted EPS if converted $0.89 $0.93 $0.97 $1.01 $1.06 - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-BDC87CB8-D18F-4163-9FA3-1C73CBE461CE-low.gif) Year 1 2 3 4 5 Earnings applicable to common shares " $900,000 " " $949,840 " " $1,000,860 " " $1,053,680 " " $1,102,500 " Add— Preferred dividends net of tax - " 12,000 " " 25,260 " " 39,840 " " 55,980 " Tax benefit on as-if converted common dividend (1) - " 3,902 " " 8,855 " " 12,072 " " 14,923 " Less— Additional compensation (2) - " 4,795 " " 9,481 " " 17,579 " " 27,468 " Adjusted earnings " $900,000 " " $960,947 " " $1,025,494 " " $1,088,013 " " $1,145,935 " Shares outstanding non-employee stock ownership plan " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " " 1,000,000 " Employee stock ownership plan as if converted (3) " 9,302 " " 30,273 " " 57,083 " " 72,575 " " 85,838 " Total " 1,009,302 " " 1,030,273 " " 1,057,083 " " 1,072,575 " " 1,085,838 " If-converted diluted EPS $0.89 $0.93 $0.97 $1.01 $1.06 - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-38E9D49E-9CEF-4D21-8829-D4BEBC9BA364-low.gif) Year 1 2 3 4 5 Calculation 1: Allocated and issued preferred shares 0 " 16,000 " " 33,648 " " 53,117 " " 74,614 " Conversion ratio 1:1 1:1 1:1 1:1 1:1 Redemption ratio 12.50/10.75 12.50/10.25 12.50/9.50 12.50/11.00 1:1 If-converted allocated and issued common shares 0 " 19,512 " " 44,274 " " 60,360 " " 74,614 " Dividends at $.50 per common share $- " $9,756 " " $22,137 " " $30,180 " " $37,307 " Tax benefit on common dividends $- " $3,902 " " $8,855 " " $12,072 " " $14,923 " Calculation 2: Allocated preferred shares (excluding top-up shares) 0 " 12,481 " " 26,686 " " 42,972 " " 61,040 " Preferred dividends at $1.25 per share $- " $15,601 " " $33,358 " " $53,715 " " $76,300 " If-converted allocated common shares (excluding top-up shares) 0 " 15,221 " " 35,113 " " $48,832 " " $61,040 " Dividends at $.50 per common share $- " $7,610 " " $17,557 " " $24,416 " " $30,520 " Additional compensation gross $- " $7,991 " " $15,801 " " $29,299 " " $45,780 " Net of tax $- " $4,795 " " $9,481 " " $17,579 " " $27,468 " Calculation 3: Average preferred shares released and issuable " 8,000 " " 24,824 " " 43,383 " " 63,866 " " 85,838 " If-converted average released and issuable common shares " 9,302 " " 30,273 " " 57,083 " " 72,575 " " 85,838 " - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-05F93B34-63E5-4D97-891E-1F4F99F725AC-low.gif) Year (1) (2) (3) (4) (5) Current provision: Income before employee stock ownership plan " $1,800,000 " " $1,900,000 " " $2,000,000 " " $2,100,000 " " $2,200,000 " Employee stock ownership plan contribution " 110,000 " " 139,000 " " 174,000 " " 204,000 " " 219,000 " Employee stock ownership plan dividends " 100,000 " " 100,000 " " 100,000 " " 100,000 " " 100,000 " Top-up contribution " 44,000 " " 43,000 " " 39,800 " " 42,900 " " 46,000 " Taxable income " 1,546,000 " " 1,618,000 " " 1,686,200 " " 1,753,100 " " 1,835,000 " Tax rate 40% 40% 40% 40% 40% " 618,400 " " 647,200 " " 674,480 " " 701,240 " " 734,000 " Deferred provision: Reduction in unearned employee stock ownership plan shares " 156,000 " " 177,600 " " 203,600 " " 225,800 " " 237,000 " Related tax deduction " 110,000 " " 150,000 " " 200,000 " " 250,000 " " 290,000 " Difference " (46,000)" " (27,600)" " (3,600)" " 24,200 " " 53,000 " Tax rate 40% 40% 40% 40% 40% Deferred tax expense (benefit) " (18,400)" " (11,040)" " (1,440)" " 9,680 " " 21,200 " Total provision " $600,000 " " $636,160 " " $673,040 " " $710,920 " " $755,200 " - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-FCFA2692-0756-4FE7-9805-FCE7D274F34F-low.gif) Year 1 2 3 4 5 Pretax income " $1,500,000 " " $1,606,000 " " $1,716,000 " " $1,831,000 " " $1,915,000 " Tax at 40 percent (statutory rate) " 600,000 " " 642,400 " " 686,400 " " 732,400 " " 780,400 " Benefit of employee stock ownership plan dividends - " (6,240)" " (13,360)" " (21,480)" " (30,520)" Effect of difference between fair value and cost of released shares - - - - " 5,320 " Provision as reported " $600,000 " " $636,160 " " $673,040 " " $710,920 " " $755,200 " ### Nonleveraged Employee Stock Ownership Plans ##### [718-40-55-34](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:b262b826eb7b4eb95305f36551772bb6a827b3029a9f3942b670d4e997661016 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraphs [718-40-25-2](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-2); [718-40-25-18 through 25-21](https://asc.understandingaccounting.org/asc/718/40/#718-40-25-18) ; [718-40-30-5](https://asc.understandingaccounting.org/asc/718/40/#718-40-30-5); and [718-40-45-9](https://asc.understandingaccounting.org/asc/718/40/#718-40-45-9) for a common stock nonleveraged [employee stock ownership plan](https://asc.understandingaccounting.org/glossary/e/#employee-stock-ownership-plan "An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan."). ##### [718-40-55-35](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:3030400c66a2be677146919e2215ae296f9282786b67c99de5953d3c7dfb3b25 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example has the following assumptions: 1. a On January 1, Year 1, Entity C established a nonleveraged employee stock ownership plan 2. b Entity C contributed 10 percent of pretax profit before employee stock ownership plan related charges to the employee stock ownership plan at the end of each of Years 1 through 5; the employee stock ownership plan bought newly issued employer stock with the contribution. 3. c The number of shares, earnings, tax, and other relevant assumptions are the same as those for Example 1, Case A (see paragraph [718-40-55-4](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-4)). ##### [718-40-55-36](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:1034490185d4cbf3565cacf6622146c89f848080857b7dfeca4b63a57c39568f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following chart sets forth Entity C's employee stock ownership plan-related information. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-7776CB68-EF4F-4574-9250-B9E93C249380-low.gif) Year Compensation Expense Dividends Number of Employee Stock Ownership Plan Shares Purchased "Cumulative Employee Stock Ownership Plan Shares" 1 " $180,000 " $- "15,652" "15,652" 2 " 190,000 " " 7,830 " "21,111" "36,763" 3 " 200,000 " " 18,380 " "20,000" "56,763" 4 " 210,000 " " 28,380 " "17,500" "74,263" 5 " 220,000 " " 37,130 " "15,278" "89,541" ##### [718-40-55-37](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:dd6482c4a1b54c03f4c956214fa04c629dead6c48bdc1fa190119ff3f82af3a2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The year-end market value is used in this Example to determine the number of employee stock ownership plan shares purchased. \[Year 1: $180,000 divided by $11.50 (See the table in the preceding paragraph) equals 15,652\] ##### [718-40-55-38](https://asc.understandingaccounting.org/asc/718/40/#718-40-55-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:05:47.367Z to 2026-09-10T01:05:47.367Z Record version: sha256:3bd205f1b94b14a331bb5dafcaad13e301838674dd9a93b2c3594f33ae2e6d9d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Entity C would record journal entries for Years 1 and 2 as follows. - ![ ](https://asc.understandingaccounting.org/asc-img/GUID-A069C6A1-E3E6-4EC1-BDC9-FC1DC15FAC81-low.gif) Year 1 Compensation expense " $180,000 " Common stock and/or paid-in capital " $180,000 " "\[To record contribution, sale of shares, and compensation expense\]" Provision for income taxes " 648,000 " Income taxes payable " 648,000 " "\[To record income taxes at 40 percent for Year 1 on earnings of $1,620,000 ($1,800,000 pre-employee stock ownership plan income less employee stock ownership plan compensation of $180,000)\]" Year 2 Compensation expense " 190,000 " Retained Earnings " 7,830 " Common stock and/or paid-in capital " 190,000 " Dividends payable " 7,830 " "\[To record contribution, sale of shares, declaration of dividends, and compensation expense\]" Dividends payable " 7,830 " Cash " 7,830 " \[To record payment of dividends\] Provision for income taxes " 684,000 " Income taxes payable " 684,000 " "\[To record income taxes at 40 percent for Year 2 on earnings of $1,710,000 ($1,900,000 pre-employee stock ownership plan income less employee stock ownership plan compensation of $190,000)\]"