S and B corporations are members of an affiliated group that has filed consolidated tax returns for several years. S drills a water well for B in Year 1 and charges B $5,000 for the service. S incurs $4,400 of expenses when drilling the well. B capitalizes the $5,000 cost of its well and amortizes it over the five-year period Years 2 through 6. S and B both use the accrual method of accounting.
a. What are the intercompany item, the corresponding items, and the recomputed corresponding items for this intercompany transaction?
b. In what year(s) are S’s profit or loss and B’s deductions taken into account for consolidated taxable income?