We have an international subsidiary with a cost plus agreement. The subsidiary does not generate any revenue and is established only to handle the wages and employee benefits of our international employees in that country. We have a cost plus agreement between our US parent company and our international subsidiary. What are the journal entries at the US and consolidated level to account for the cost plus agreement?
Accounting for a Cost Plus Subsidiary
Assuming that invoices for 100 cost + 5% markup = 105 are paid on some due date after invoicing, the US parent entity and sub would:
Parent: Dr i/c expense 105, Cr i/c accounts payable 105
Sub: Dr i/c accounts receivable 105, Cr i/c revenue 105
Sub: Dr wage expense 100, Cr cash 100
In consolidation, all the i/c entries would be eliminated, leaving 100 wage expense and 100 less cash.
As always with such questions, the facts may be unclear.
> Are the international employees those of the US parent working in the foreign country or employees of the local sub?
> If US parent, you may have some "permanent establishment" taxable presence concerns for the US parent conducting business in the foreign country.
> If sub, why is payment by US when services are being provided to local sub?
> Has the markup been reviewed for arm's length consideration in accordance with transfer pricing regulations?
What may be clearer and easier to consolidate on the debits/credits is not to use a/r & a/p between Parent & Sub and use a Due to/From account.