In both lateral and upstream transactions, the subsidiary records the transaction and the profit/loss from it.Thus, the profit/loss can be shared between majority and minority interests, as the parent’s shareholders and minority interest share the ownership of the subsidiary.The equity method records the investment as an asset, more specifically as an investment in associates or affiliates, and the investor accrues a proportionate share of the investee’s income. This has been a guide to the consolidation method of accounting for investments.

Parent Company has recently just begun operation and, thus, has a simple financial structure. Parent, the sole owner of Parent Company, injects $20M cash into his business. As such, Parent Company’s balances are now 20M in assets and 20M in equity.

The next month, Parent Company sets up Child Inc, a new subsidiary.

Under the consolidation method, a parent company combines its own revenue with 100% of the revenue of the subsidiary.

The parent company will report the “investment in subsidiary” as an asset, with the subsidiary reporting the equivalent equity owned by the parent as equity on its own accounts.

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The consolidation method is a type of investment accounting used for consolidating the financial statements of majority ownership investments.

Thus, profit/loss will be visible to the parent’s shareholders only, and not to the minority interest’s.

: This is a transaction between two subsidiaries of the same company.

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