Choice "C" is correct.

Choice "d" is incorrect. Interest expense is not recorded as a debit to retained earnings. The interest expense will be reported on the income statement in the periods incurred. Only the $100,000 declared dividend will be debited to retained earnings.
Choice "b" is incorrect. Retained earnings will be debited for the $100,000 dividend on the April 1, Year 1 dividend declaration date. Interest expense will be reported on the income statement in the periods incurred.
Choice "a" is incorrect. Consistent with the matching principle, interest expense will be debited for $7,500 on December 31, Year 1 for the interest accrued from April 1, Year 1 - December 31, Year 1 and will be debited for $2,500 on March 31, Year 2 for the interest accrued from January 1, Year 2 - March 31, Year 2.