Final answer:
The correct journal entry for issuing a note on November 1 is 'Cash $7,000 to Notes Payable $7,000.' Interest expense is not recorded until it is incurred over the period the note is outstanding. The impact of market interest rates on bond prices means a bond will be discounted if market rates exceed its coupon rate.
Step-by-step explanation:
The correct journal entry to record the issue of a note on November 1, Year 1, where Cove Company borrows $7,000 cash from Shelter Company at an annual interest rate of 7% would be:
Cash $7,000
Notes Payable $7,000
This entry reflects the receipt of cash and the creation of a liability in the form of a note payable. The interest expense is not included in this entry because it has not yet been incurred; it will be recognized periodically over the life of the note, typically at the end of each accounting period.
Regarding the given examples in the loan scenarios, when Singleton Bank lends $9 million to Hank's Auto Supply, it records this loan as an asset on its balance sheet. This generates interest income for Singleton Bank. The bank issues Hank's Auto Supply a cashier's check for $9 million, which Hank deposits into his checking account at First National Bank, increasing First National's deposits and reserves by $9 million. First National then has the ability to loan out the remainder of these funds, beyond the required reserves.
When discussing the purchase of a bond, the change in market interest rates directly impacts the bond's price. Due to present value considerations, if the current market rate is higher than the bond's coupon rate, as in the scenario where you consider buying a bond with a 6% rate when market rates are 9%, the bond's price will typically be less than its face value.