Apex Inc. purchases, transports, and distributes natural gas to industrial and 9 residential customers in the whole Texas. On the morning of September 30, 2013, its CFO Andy read into the computer system and saw the drafted forecasted quarterly income statement for the 3rd quarter of 2013:

                                        (in Millions)

Revenue                               $100

COGs                                        (50)

Gross Profit                             50

Less: SG&A expenses              35

Operating Profit                     15

Add: Other interest income     1

Less: Interest expense             (2)

Income before tax                $14

According to the Wall Street consensus, the analyst community expected a quarterly revenue of $101.5 million and an income before tax number at $14.5 million. Andy worries that the Wall Street will be disappointed one month later when quarterly income statement is released: Apex will miss both the top line and bottom line targets! Andy called his close friend Jack, a senior investment banking manager at Morris Linden, and arranged a last-minute sale transaction of a natural gas barge ship to Morris Linden: Morris Linden agreed to buy this used barge ship at $3 million (Apex purchased that barge ship 10 years ago, total book historical cost at $4 million, half-depreciated with a net book value of $2 million. Due to recent natural gas market boom and inflation, the market value of a comparable second-hand natural gas barge ship is now $3 million). Morris Linden will warehouse this barge ship for two months, then sell back to Apex at $3 million, plus warehouse fees for 60 days, and a “management fee” calculated by multiplying current USD 2-month LIBOR+4% (London Inter-bank Offer Rate) with 60 days. The annualized 2-month LIBOR on September 30, 2013, was 2%, thus the LIBOR+4% was actually 6%.

Andy rushed the paper work to ensure that this transaction was concluded by the mid-night of September 30, 2013. Jack promised that cash would be wired into Apex’s Bank of America account in two business days. Andy informed the controller Amy of this new transaction, and $3 million was added to the total revenue. The new drafted quarterly income statement looks like below:

                                        (in Millions)

Revenue                               $103

COGs                                         (52)

Gross Profit                               51

Less: SG&A expenses               35

Operating Profit                      16

Add: Other interest income       1

Less: Interest expense               (2)

Income before tax                 $15

Required: Please critically assess this last-minute transaction and the new drafted quarterly income statement. Please review carefully the transaction terms 10 and apply the “faithful representation” (also called SOF, substance over legal form) principle to point out the true nature of this transaction and propose the right journal entries.

Answer rating: 100% (QA)

In the given se the rretly drfted qurterly inme sttement is mniulted in rder t mly with the Wll Stre... View the full answer