Big Corporation receives management consulting services from its 92 percent owned subsidiary,Small Inc.During 2007,Big paid Small $125,432 for its services.For the year 2008,Small billed Big $140,000 for such services and collected all but $7,900 by year-end.Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 2007 and $121,000 in 2008.Big reported $2,567,000 of income from its own separate operations for 2008,and Small reported net income of $695,000.
-Based on the preceding information,what amount of consolidated net income should be reported in 2008?

Question

Quizplus · Accepted Answer

Consolidated net income is calculated as the sum of the separate net incomes of the parent and subsidiary, plus any intercompany profits or losses eliminated in consolidation. In this case, the intercompany profit is the difference between the amount Big paid Small for services and the amount Small incurred in providing those services. In 2007, the intercompany profit was $125,432 - $86,000 = $39,432. In 2008, the intercompany profit was $140,000 - $121,000 = $19,000. Therefore, the consolidated net income for 2008 is $2,567,000 + $695,000 + $19,000 = $3,262,000.

Big Corporation Receives Management Consulting Services from Its 92 Percent