On January 1, a company issues bonds dated January 1 with a par value of $500,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 12% and the bonds are sold for $481,603. The journal entry to record the first interest payment using the effective interest method of amortization is:

a) Debit Interest Expense $28,896; credit Discount on Bonds Payable $1,396; credit Cash $27,500.

b) Debit Interest Expense $28,896; credit Premium on Bonds Payable $1,396; credit Cash $27,500.

c) Debit Interest Payable $27,500; credit Cash $27,500.

d) Debit Interest Expense $26,104; debit Premium on Bonds Payable $1,396; credit Cash $27,500.