At the beginning of the year, the board of directors approved a compensatory stock option plan that grants options to the companys four executives to purchase 100,000 shares each of the companys common shares. The board expects that the period of benefit/service for these options is two years. The options can be exercised at a strike price of $1 per share any time over a three-year period commencing after the initial two-year service period ends. The fair value of the options, as determined using an option pricing model, is $1,550,000.

Account for this using journal entries and show supporting calculations. Explain relevance to financial statements.