We are given that the mean of the observations is 14. The sum of the observations is:
\[
\frac{6 + 16 + (K + 26) + (2K - 3) + 10}{5} = 14
\]
Simplifying the numerator:
\[
6 + 16 + K + 26 + 2K - 3 + 10 = 55 + 3K
\]
Thus, the equation becomes:
\[
\frac{55 + 3K}{5} = 14
\]
Multiplying both sides by 5:
\[
55 + 3K = 70
\]
Solving for \( K \):
\[
3K = 15 \quad \Rightarrow \quad K = 5
\]
Now, substitute \( K = 5 \) into the expression \( \frac{K^2 + 1}{2} \):
\[
\frac{K^2 + 1}{2} = \frac{5^2 + 1}{2} = \frac{25 + 1}{2} = \frac{26}{2} = 13
\]
Thus, the correct answer is \( \boxed{13} \).