East Corp., a calendar-year company, had sufficient retained earnings in 2006 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, 2006, and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, 2006, had a maturity date of March 31, 2007, and a 10% interest rate. How should East account for the scrip dividend and related interest?

  1. Debit retained earnings for $110,000 on April 1, 2006.
  2. Debit retained earnings for $110,000 on March 31, 2007.
  3. Debit retained earnings for $100,000 on April 1, 2006, and debit interest expense for $10,000 on March 31, 2007.
  4. Debit retained earnings for $100,000 on April 1, 2006, and debit interest expense for $7,500 on December 31, 2006.