Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 20X8 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 20X9, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 20X8 and 20X9 consolidated financial statements.
What will be an ideal response?
Peter has provided a service to the subsidiary Smith. During 2008 the cost of the architectural services will be capitalized by Smith as part of the cost of the manufacturing facility. The profit earned on the consulting services must be eliminated in 2008 against the cost of the building. In this manner consolidated net income is not overstated.
Beginning in 2009 the intercompany profit would be realized over a 5 year period. In each of the years, depreciation expense is decreased and consolidated net income is increased; as income to the controlling interests.
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