On January 2, 2017, Dwyer Corporation granted 10,000 nonqualified stock options each to four 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, 2020, 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. Three employees exercised options for 30,000 shares of stock on January 2, 2021. Dwyer has a tax rate of 35% in all years. Relevant dates and stock prices are as follows:
January 2, 2017......................$10
December 31, 2017...................19
December 31, 2018...................28
December 31, 2019...................45
December 31, 2020...................26
January 2, 2021........................26
December 31, 2021...................25
Required:
1. Prepare the compensation expense and related tax journal entries from 2017 to 2019. Round answers to the nearest dollar.
2. Prepare the journal entries required to record the stock option exercise on January 2, 2021. Include the journal entries to record the tax effects. Round answers to the nearest dollar.
3. Prepare a schedule to show how the January 2, 2021, option exercise affects Dwyer's 2021 income tax expense, and explain how the change in income tax expense affects its effective tax rate.