Question

A parent owns 90% of a subsidiary. The parent provides marketing services to the subsidiary during 2014. The parent charged the subsidiary $1,000,000 for the services. The services cost the parent $700,000. Which statement is TRUE concerning the consolidation elimination entry or entries related to the intercompany services?

Answer 1

To prepare consolidated financial statements, a parent company must eliminate intercompany transactions with its subsidiary. It includes removing both the charged revenue and expense related to provided services, and any internal profit resulting from the markup.

Step-by-step explanation:

When a parent company provides services to its subsidiary, and both are part of a consolidated group, intercompany transactions must be eliminated in preparation for consolidated financial statements. In this case, the parent company charged the subsidiary $1,000,000 for marketing services, with an actual cost of $700,000. The relevant consolidation elimination entry would remove the $1,000,000 in revenue reported by the parent and the $1,000,000 in expense reported by the subsidiary. The $300,000 internal profit (the markup) also needs to be eliminated.

This ensures that consolidated financial statements present only the external transactions and financial position of the entire group, not intercompany transactions that do not affect third parties. Therefore, the true statement concerning the consolidation elimination entry would be that both the revenue and the expense related to these intercompany services, as well as any resulting internal profit, must be eliminated in the consolidated financial statements.