Final answer:
The $2,000 compensating balance should be reported as restricted cash in the long-term assets section of Jackson Corp's balance sheet, since the loan is due in 5 years. It must also be disclosed in the financial statement notes. Such compensating balances are not available for use by the company.
Step-by-step explanation:
The student asked how the $2,000 compensating balance required by Jackson Corp's bank loan should be reported. A compensating balance is a minimum balance that a bank requires a borrower to maintain in a deposit account as part of a loan agreement. This amount is not available for company use and is effectively 'frozen'.
The $2,000 compensating balance should be reported in the financial statements as a restricted cash balance within the current assets section if the debt is due within one year. Since the note is due in 5 years, this compensating balance is reported as a non-current (or long-term) asset. Moreover, companies must disclose the nature and amount of the restricted cash in the notes to the financial statements, explaining that these funds are not available for general corporate use.
The overall impact on the money supply from bank lending activities is explained through examples provided in the question, showing how deposits and loans can increase reserves and enable additional lending activities within the banking system.