At this point, it is presupposed that you have a firm foundation on the elimination entries resulting from the initial acquisition of the controlling interest that the parent has in the subsidiary. It is also presupposed that you have an equally firm foundation on the elimination entries that changes in the net asset values from the acquisition require. Finally, it’s presupposed that you are now an expert in determining who gets what of the income, and in the worksheet techniques that lead to the consolidated financial statements.
What if the parent transacts business with the subsidiary, or vice versa? If the consolidated financial statements are designed to depict the parent and subsidiary as one economic entity, then transactions between the parent and subsidiary are like moving a ball from one hand to the next. The ball is still there – it’s just in a different hand.
What this means is that intercompany transactions need to be added to the list of things that require elimination. This chapter deals with several types of intercompany transactions: (1) intercompany sales of merchandise; (2) intercompany sales of plant assets; and (3) intercompany notes. Go here to find out more.