On January 2, 20X1, Dwyer Corporation (a fictional company) granted 4,000 nonqualified stock options each to 10 of its key executives (40,000 options in total). Under the terms of the option plan, upon exercise, each executive will pay the exercise price of $10 per share of common stock ($1 par value). The options were exercisable after January 1, 20X4, and the executives were required to be employees of Dwyer at the date of exercise. The Black-Scholes value of the option on the grant date is $12.50. Eight employees exercised options for 32,000 shares of stock on January 2, 20X5. Dwyer has a tax rate of 21% in all years. Dwyer's deduction for compensation expense will not be affected by the $1 million limit. Relevant dates and stock prices are as follows: January 2, 20X1 December 31, 20X1 December 31, 20X2 December 31, 20X3 December 31, 20X4 January 2, 20x5 December 31, 20X5 $ 10 19 28 45 26 26 25 Required: 1. Prepare the pre-tax compensation expense tax journal entries from 20x1 to 20x3. 2. Prepare the journal entries required to record the stock option exercise on January 2, 20X5. 3. Prepare journal entries to record the tax effects associated with the stock option plan. 4. Prepare a schedule to show how the January 2, 20X5, option exercise affects Dwyer's 20X5 income tax expense, and explain how the change in income tax expense affects its effective tax rate. Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare the pre-tax compensation expense tax journal entries from 20x1 to 20X3. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round answers to the nearest dollar.) No Date General Journal Debit Credit 1 December 31, 20X Compensation expense 166,667 Preferred stock 166,667 2 December 31, 20x2 Compensation expense 166,667 Additional paid-in capital 166,667 3 December 31, 20X Compensation expense Dividend 166,667 Required 1 Required 2 > X Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare the journal entries required to record the stock option exercise on January 2, 20X5. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Round answers to the nearest dollar.) No Date General Journal Debit Credit 1 January 2, 20X5 Cash 320,000 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare journal entries to record the tax effects associated with the stock option plan. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field. Do not round intermediate calculations. Round answers to the nearest dollar.) No Transaction General Journal Debit Credit 1 01 Income tax expense - current 84,000 X Deferred income tax asset 84,000 X X Answer is not complete. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Prepare a schedule to show how the January 2, 20X5, option exercise affects Dwyer's 20X5 income tax expense. (Amounts to be deducted should be indicated by a minus sign.) Amounts Income tax expense-deferred Income tax expense-current Net increase (reduction) in tax expense
