In business, consolidation or amalgamation is the merger and acquisition of many smaller companies into a few much larger ones.
Under the equity method, the purchaser records its investment at original cost.
This balance increases with income and decreases for dividends from the subsidiary that accrue to the purchaser.
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.
The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship.
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[2][3] the intercompany transactions, the subsidiary's stockholder equity and the parent's investment account.