Reference no: EM133152862

Question - MMM, Inc., a US corporation, owns 70 percent of the common voting shares of SSS, Inc. and reports it as a subsidiary in its consolidated financial statements. MMM, Inc. provides legal services to all of its subsidiaries and bills them 150 percent of the cost of services rendered.

In 2021, SSS, Inc. recorded legal expenses of $1,500,000 when it paid MMM, Inc. for legal assistance in an unsuccessful patent infringement lawsuit against another company.

You are working as an intern at the MMM company and have been assigned the task of reviewing the consolidation of the accounts of the parent company and its subsidiaries. You noted that when preparing the consolidated statements as of December 31, 2021, no consolidation entries were made for legal services between MMM and SSS.

After explaining to the chief accountant that accounting standards in the United States require that this transaction be taken into account in the preparation of the consolidated financial statements, MMM's chief accountant told him that intercompany services are not mentioned in the company consolidation manual and in addition, the company needs to report legal services income of $1.5 million to report earnings per share equal to or greater than that expected by financial analysts and investors.

Required - According to the FASB codification, what is the correct treatment of legal services between both companies? Include the citation corresponding to the FASB coding.

Provide the consolidation entry that you would recommend to comply with the FASB Codification.

Assuming that your recommendation is not taken into account, identify and summarize the ethical issue that exists in this situation, and discuss who are the affected parties in this situation if incorrect consolidated statements are published.