Wesley Company granted compensatory common stock options to its executives on January 1, 2003, the measurement date, for services to be rendered during 2003 and 2004. The quoted market price of Wesley's par value common stock exceeded the option price on January 1, 2003.

The options were exercisable beginning on January 1, 2005, and they lapsed on December 31, 2005. Half of the stock options were exercised in 2005 and half were allowed to lapse.

Required:

a. How should Wesley determine the amount of compensation expense related to the compensatory stock options, if any, that should be recognized in its income statements for 2003, 2004, and 2005? Why?

b. How should Wesley account for the exercise of the stock option? Justify the accounting recommended.

c. How should Wesley account for the lapse of the stock options? Justify the accounting recommended.