East Corp., a calendar-year company, had sufficient retained
earnings in year 1 as a basis for dividends, but was temporarily
short of cash. East declared a dividend of $100,000 on April 1,
year 1, and issued promissory notes to its stockholders in lieu of
cash. The notes, which were dated April 1, year 1, had a maturity
date of March 31, year 2, and a 10% interest rate. How should
East account for the scrip dividend and related interest?

Debit retained earnings for $110,000 on April 1, year 1.
Debit retained earnings for $110,000 on March 31,
year 2.
Debit retained earnings for $100,000 on April 1, year 1,
and debit interest expense for $10,000 on March 31,
year 2.
Debit retained earnings for $100,000 on April 1, year 1,
and debit interest expense for $7,500 on December 31,
year 1.