Dream Corporation owns 90 percent of Classic Company's common stock and 70 percent of Plain Company's stock. Dream provides legal services to each subsidiary and bills it for 150 percent of the cost of the services provided. During 20X3, Classic recorded legal expenses of $80,000 when it paid Dream for legal assistance in an unsuccessful patent infringement suit against another company, and Plain recorded legal expenses of $150,000 when it paid Dream for legal work associated with the purchase of additional property in Montana to expand an existing strip mine owned by Plain. In preparing the consolidated statements at December 31, 20X3, no eliminations were made for intercompany services. When asked why no entries had been made to eliminate the intercompany services, Dream's chief accountant replied that intercompany services are not mentioned in the company accounting manual and can be ignored.

Prepare a memo detailing the appropriate treatment of legal services provided by Dream to Plain and Classic during 20X3. Include citations to or quotations from authoritative accounting standards to support your recommendations. In addition, provide the elimination entries at December 31, 20X3 and 20X4, needed as a result of the services provided in 20X3, and explain why each debit or credit is necessary.

  • CreatedMay 23, 2014
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