1. Elimination of Parent Investment and Subsidiary Equity
On consolidation, the parent company’s asset account “Investment in Subsidiary” must be completely eliminated against the equity accounts (Common Stock, Retained Earnings, Share Premium) of the subsidiary. The parent’s balance sheet cannot report its own internal ownership stake; it must report the underlying assets and liabilities of the subsidiary directly.
 
2. Intragroup Inventory Profits and Unrealized Markups
When entities within a consolidated group sell inventory to one another, any unrealized profit remaining in inventory at the end of the reporting period must be eliminated.
Unrealized Profit = Ending Inventory Balance Purchased Intragroup × Gross Profit Margin on Sale
  • Downstream Sale Adjustments: If the parent sold to the subsidiary, the elimination entry adjusts the parent’s consolidated cost of goods sold and reduces the consolidated inventory balance.
  • Upstream Sale Adjustments: If the subsidiary sold to the parent, the elimination entry adjusts the subsidiary’s profit records. This requires a pro-rata reduction to both the parent’s retained earnings and the NCI balance based on ownership percentages.

 
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