Please read the statement below. Diamond Manufacturing Company regularly purchas

Question

Please read the statement below.

Diamond Manufacturing Company regularly purchases janitorial and maintenance services from its wholly owned subsidiary, Schwartz Maintenance Services Inc. Schwartz bills Diamond monthly at its regular rates for the services provided, with the services consisting primarily of cleaning, grounds keeping, and small repairs. The cost of providing the services that Schwartz sells consist mostly of salaries and associated labor costs that total about 60 percent of the amount billed. Diamond issues consolidated financial statements annually.

Required:

1. When Diamond prepares consolidated financial statements, what account balances of Diamond and Schwartz related to the intercompany sale of services must be adjusted or eliminated in the consolidation worksheet? What impact do these adjustments have on consolidated net income?

2. In the case of intercompany sales of services at a profit, at what point in time are the intercompany profits considered to be realized? Explain.

Explanation / Answer

1. While preparing the consolidated finacials , in the worksheet the following adjustment will be made;

Group Revenue Dr .... Total Billing of Schwartz to Diamond

Group Cost of Sales Cr .... Total Billing of Schwartz to Diamond

Net income from group consolidation point will not change amount wise .

2. In case of intercompany sales of service , if the service procurement company acts as a contractor and bills the service procured to a third party with profit margin , then the intercompany profits cosnsidered to be realized.

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