Final answer:
The necessary elimination entry on the consolidation workpaper involves debiting intercompany revenues by 125,000, crediting intercompany expenses by 100,000, and crediting intercompany profit payable/equity by 25,000 to correct for the overcharged administrative services between the parent company and subsidiary.
Step-by-step explanation:
When a parent company provides services to a subsidiary, and the cost of these services are intercompany transactions, these must be eliminated during the consolidation process. Since the parent incurred costs of 100,000 but charged the subsidiary 125,000, this leads to an intercompany profit of 25,000 that needs to be eliminated to avoid overstating expenses and revenues in the consolidated financial statements.
The elimination entry on the consolidation workpaper would be to debit intercompany revenues (to remove the 125,000 charged by the parent) and credit intercompany expenses (to remove the 125,000 recognized as an expense by the subsidiary). Additionally, you would need to eliminate the 25,000 intercompany profit that was realized in the transaction.
Here is the necessary elimination entry:
- Debit Intercompany Revenues: 125,000
- Credit Intercompany Expenses: 100,000
- Credit Intercompany Profit Payable/Equity: 25,000
This entry ensures that the costs and revenues are correctly presented in the consolidated financial statements without the effect of intercompany transactions, which would otherwise distort the financial position and performance of the combined entities.