How would any management fees charged by a Parent Company to its Subsidiary be accounted for during the consolidation process?

A) The Parent Company would only record its pro rata share of any management revenues.
B) The Parent Company's profit on the rendering of management services would be charged to retained earnings.
C) Both the Parent's management fees and the subsidiary's related expense would be eliminated when preparing Consolidated Financial Statements.
D) No special accounting treatment is required, since this would have no effect on Consolidated Net Income.

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Colton Sullivan · Accepted Answer

Final Answer : C, Explanation :  During the consolidation process, any management fees charged by the Parent Company to its Subsidiary would be eliminated. This is because such fees constitute internal transactions and are not indicative of any income earned outside the group. Hence, the management fees charged by the Parent Company and the related expenses of the subsidiary would be offset against each other in the preparation of Consolidated Financial Statements. This would result in a more accurate representation of the group's financial results and position, as it would exclude any intercompany transactions that do not represent income or expenses earned or incurred outside the group.

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