Question

Exercise 16-27 (LO. 2)

Gaffney Corporation is a wholesale distributor of auto parts and uses the cash method of accounting. The company's sales have been about $20,000,000 per year for the last few years. However, Gaffney has the opportunity to acquire an unincorporated competitor with annual sales of $10,000,000.

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 the $.......?........ statutory threshold. Therefore, Gaffney will likely be required to change to the accrual method for the year of the acquisition.

Answer 1

Cash Method Versus Accrual Method: Cash technique alludes to the strategy where pay and costs are perceived just when money got or paid. Then again, under collection strategy, pay and consumptions are perceived when acquired or exhausted, paying little heed to money got or not.

For this situation, the G Corporation should change its bookkeeping framework from money technique to collection strategy. Whenever gained the consolidated deals of both the organization would be $30 million ($20 million + $10 million)