Companies have many different practices for pricing transfers of goods and services from one affiliate to another. Regardless of the approaches used for internal decision making and performance evaluation, or for tax purposes, all intercompany profits, unless immaterial, are supposed to be eliminated when preparing consolidated financial statements until confirmed through transactions with external parties.

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a. Century Telephone Enterprises Inc. provides certain services to its subsidiaries, and some of its service subsidiaries provide services and materials to Century's telephone subsidiaries. How are these transactions billed among the affiliates? Are intercompany profits eliminated when consolidated financial statements are prepared? Explain.

b. GTE Corporation also is in the telephone business, although it is larger and more diversified than Century Telephone. How does it treat intercompany profits for consolidation?

c. New York Life Insurance Company is a regulated company, although the regulation is different than for public utilities such as Century Telephone. New York Life owns a subsidiary, New York Life Insurance and Annuity Corporation. Do these companies engage in any intercompany transactions other than those directly related to New York Life's ownership interest? How can you tell?

d. Harley-Davidson operates in two business areas: (1) motorcycles and related products, and (2) financial services. Does Harley eliminate all effects of intercompany transactions when preparing consolidated financial statements? Explain. What effect does Harley's treatment have on consolidated net income?