Question

A parent provided services to its subsidiary in 2014, at a cost to the parent of 300,000. The parent charged the subsidiary 325,000 for the services. On the 2014 consolidated income statement, what should be reported with respect to this information?

Answer 1

On the 2014 consolidated income statement, the intra-group profit of 25,000 from the services the parent provided to its subsidiary should be eliminated, reporting only the actual cost of 300,000 as an expense.

Step-by-step explanation:

When consolidating financial statements for a parent company and its subsidiary, all intra-group transactions must be eliminated to avoid double counting. Since the parent provided services to its subsidiary for 300,000 and charged the subsidiary 325,000, the transaction resulted in an intra-group profit of 25,000. Therefore, on the 2014 consolidated income statement, this intra-group profit should be eliminated. The consolidated income statement will only report the actual costs incurred by the parent company, which is 300,000, as an expense and no revenue from this transaction.