Question

Gaffney Corporation is a wholesale distributor of auto parts and uses the cash method of accounting. The company’s sales have been about $8,775,000 per year for the last few years. However, Gaffney has the opportunity to acquire an unincorporated competitor with annual sales of $9,652,500.

Complete the following paragraph regarding the accounting implications of acquiring the competitor.

For the year of acquisition, Gaffney and the acquired business will be treated as a single business. Gaffney must  consider the combined gross receipts of both businesses in determining if the average annual gross receipts for the prior three-year period exceed
$ ____________statutory threshold. Therefore, Gaffney will likely be able to continue using the cash method for the year of the acquisition.

Answer 1

ANSWER

For the year of acquisition, Gaffney and the acquired business will be treated as one business. Gaffney must consider the combined gross receipts of both businesses in determining if the average annual gross receipts for the prior three-year period exceed
$ 25 million statutory threshold. Therefore, Gaffney will likely be able to continue using the cash method for the year of the acquisition.

Explanation:

After acquisition Gaffney and the acquired business will be treated as one business. Aggregate rule applies and hence Gaffney must combined gross receipts of both businesses in determining if the average annual gross receipts for the prior three-year period exceed threshold value. The TCJA has increased the threshold value to $25 million. Gaffney will likely be able to continue using the cash method since aggregate sales ( $8,775,000 + $9,652,500) is less than $25 million

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