Consolidated financial statements show the parent and the subsidiary as one single entity.

During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. However, at the end of the year, a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary’s stockholder equity and the parent’s investment account.

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In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements, where all subsidiaries report under the umbrella of a parent company.

Consolidation also refers to the merger and acquisition of smaller companies into larger companies.

Treatment of Purchase Differentials: At the time of purchase, purchase differentials arise from the difference between the cost of the investment and the book value of the underlying assets.

Purchase differentials have two components: Purchase differentials need to be amortized over their useful life; however, new accounting guidance states that goodwill is not amortized or reduced until it is permanently impaired, or the underlying asset is sold.

In this type of relationship the controlling company is the parent and the controlled company is the subsidiary.

The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.

In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into much larger ones.

In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements.

The company does not need any entries to adjust this account balance unless the investment is considered impaired or there are liquidating dividends, both of which reduce the investment account.

Liquidating dividends : Liquidating dividends occur when there is an excess of dividends declared over earnings of the acquired company since the date of acquisition.

Such disclosures are: When a company purchases 20% or less of the outstanding common stock, the purchasing company’s influence over the acquired company is not significant.