Question

"A 80%-owned subsidiary provides services to its parent during 2013. Cost of services provided is $200,000. The subsidiary charged the parent $450,000 for the services. Which statement is true concerning the information that should appear on the 2013 consolidated income statement?

a) The consolidated income statement will reflect the services revenue from the subsidiary at the parent-charged amount of $450,000.
b) The consolidated income statement will report the cost of services at the subsidiary's actual cost of $200,000.
c) The consolidated income statement will not include any information about the intercompany services.
d) The consolidated income statement will show a profit of $250,000 from the intercompany services transaction."

Answer 1

The correct answer is that the consolidated income statement will report the cost of services at the subsidiary's actual cost of $200,000, eliminating the intercompany markup for accurate presentation.

Step-by-step explanation:

When a parent company and its subsidiary conduct transactions, special considerations must be made for consolidated financial statements. According to generally accepted accounting principles (GAAP), intercompany transactions must be eliminated to avoid double-counting when the two companies' financials are consolidated. In this case, where an 80%-owned subsidiary provides services to its parent company, the key point is that the intercompany profits must be eliminated in the consolidated statements.

Given the information provided, the correct answer to the question is b) The consolidated income statement will report the cost of services at the subsidiary's actual cost of $200,000. Since the parent owns 80% of the subsidiary, the internal charge of $450,000 between the two entities is an artificial transfer price and does not represent an actual revenue to the consolidated entity. Therefore, the $250,000 markup from the subsidiary to the parent is eliminated on consolidation, reflecting only the true costs incurred by the subsidiary.