In the years after a seller makes an intercompany sale of equipment at a gain, Equity investment is increased in the consolidation entries. Why does the amount of the Equity investment adjustment change from year to year?

Example below is gives a better explanation

Parent Company has recently just begun operation and, thus, has a simple financial structure. Mr. Parent, the sole owner of Parent Company, injects $20M cash into his business. This appears as the following journal entry.

Dr.Cash20,000,000

Cr.  Shareholder’s Equity20,000,000

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. Parent Company invests $10M in the company for 100% of its equity. On Parent’s books, this shows up as the following.

Dr.Investments in Subsidiary10,000,000

Cr.  Cash10,000,000

Parent Company now has $10M less cash, but still has a total of $20M in assets.

On Child’s books, the same transaction would show up as follows.

Dr.Cash10,000,000

Cr.  Shareholder’s Equity10,000,000

At the end of the year, Parent Company must create a consolidated statement for itself and Child Inc.  Assuming no other transactions occur in the year, the consolidated statement would look like the following:

 Parent CompanyChild Inc.Elimination AdjustmentConsolidated

Assets    

Cash10,000,00010,000,000  20,000,000

Investment in Subsidiary10,000,000  -10,000,0000

Equity    

Shareholder's Equity20,000,00010,000,000-10,000,00020,000,000

As can be seen above, the elimination adjustment is necessary so as not to overstate the consolidated balance sheet. If the elimination adjustment were not made, the consolidated assets of both companies would total 30,000,000, which is not true, as money was simply moved between the two companies. In other words, not making the elimination adjustment would result in a false creation of value.

Explanation:

answer; common market;