Final answer:
The journal entry for interest allocation on a non-interest bearing note involves recording the loan amount as an asset for the lender and a liability for the borrower. Interest income is periodically recognized by the lender, and interest expense is recognized by the borrower through adjusting journal entries over the life of the note.
Step-by-step explanation:
The student is inquiring about the journal entry for interest allocation on a non-interest bearing note for both the borrower and the lender. In such transactions, the lender provides the borrower with a certain amount, which in this case is $9 million. The borrower does not receive the interest portion in cash, but rather, this interest is included in the note's face value and amortized over the life of the note.
When Singleton Bank issues a $9 million loan to Hank's Auto Supply, it records the loan as an asset on its balance sheet. This is because the loan will generate interest income. Hank's Auto Supply then deposits the amount into their checking account, which increases First National's reserves by the same amount. First National is required to keep 10% of the deposit as reserves but can loan out the remaining balance. The journal entry to record the issuance of the non-interest bearing note from the bank's perspective would typically credit the Cash or Checking Account and debit a Notes Receivable account. Over time, periodic journal entries would adjust for the interest income accrued on the loan, affecting the bank's Interest Income and Notes Receivable accounts.
From Hank's Auto Supply's perspective, the initial journal entry would debit Cash or Checking Account and credit Notes Payable. As time passes and the interest expense gets allocated, Hank's Auto Supply would need to adjust its Notes Payable and record the interest expense accordingly.