Simulation 1 spring 2016

The Following is an excerpt from an SEC litigation against Ground Touch.

In or around early 2012, Ground Touch developed a new product, designed for sale to Mexico's largest provider of landline telephone services (Telephone).

On July 30, 2012, Ground Touch contacted a Florida provider of logistics and fulfillment services (Florida Logistics) about the possibility of warehousing Ground Touch's product for possible sale to Telephone. Ground Touch had never done business with Florida Logistics prior to July 30, 2012.

During contract negotiations related to this potential warehousing arrangement, Florida Logistics’ CEO told the CEO of Ground Touch that Florida Logistics was not buying any product from Ground Touch, but rather would only warehouse the inventory for eventual delivery to Telephone or other customers of Ground Touch.

On July 30, 2012, Ground Touch and Florida Logistics signed a Fulfillment and Logistics Agreement (the "Agreement"), which included, among other terms, the following provisions:

a)  "Section 3 (Orders and Acceptance): Florida Logistics’ purchase orders are subject to purchase orders by Telephone and/or any other customer that may be assigned from time to time by Ground Touch. In the event Telephone or any of the customers does not fulfill the purchase orders and/or cancels the orders, Florida Logistics shall have the right to return these products to Ground Touch and obtain a full credit equal to the original purchase amount with no offsets or deductions or any kind.";

b)  "Section 6 (Payment): Florida Logistics shall pay for Products in 90 days in accordance with the payment terms invoiced by Ground Touch. However, Florida Logistics shall not be obligated to pay Ground Touch until the Products have been received by Telephone and Florida Logistics has received full payment therefore, at which time then Florida Logistics shall pay Ground Touch for the Products within 10 days thereafter."

The same day, Florida Logistics issued a $1.74 million "purchase order" for 20,000 units of the product (the "Purchase Order"). The Purchase Order stated that its payment terms were "according to the Agreement."

Ground Touch shipped approximately $1.24 million of inventory to Florida Logistics during the third quarter of 2012, pursuant to the Agreement and the Purchase Order. Ground Touch recognized revenue on all $1.24 million of inventory shipped to Florida Logistics during the quarter.

Ground Touch did not receive any payment from Florida Logistics during the third quarter of 2012, and likewise received no commitment from Telephone that it would buy product shipped to Florida Logistics, or otherwise.

On November 14, 2012, Ground Touch filed its Form 10-Q for the third quarter of 2012, reporting net revenues of $1,031,747. Without the revenue recognized on the inventory shipped to Florida Logistics, Ground Touch would not have had any positive revenue for the quarter.

The false and misleading statements in Ground Touch’s Form 10-Q were material. These statements would have been viewed by a reasonable investor as significantly altering the total mix of available information, given that Ground Touch would not have had any positive revenues for the quarter if it did not recognize the revenue from Florida Logistics. The Form 10-Q also reflected Ground Touch’s largest revenues ever reported for a quarter.

What journal entry did Ground Touch make after shipping the product to Florida Logistics in 2012?

What should Ground Touch have done instead?