These five actions are done at the same time in the consolidation journal entry.The basic journal entry for the consolidation is to debit "Common Stock of the Subsidiary," "Additional Paid In Capital of the Subsidiary," "Retained Earnings of the Subsidiary," "Goodwill" and the adjustments to fair value on the company's balance sheet.
This is because the parent has controlling interest in the subsidiary group of companies.
In both cases, combined and consolidated financial statements, accountants must keep track of the noncontrolling interest relationship between the parent and subsidiary.
There are five important rules an accountant must follow when consolidating.
First, the accounting must eliminate all of the subsidiary's shareholders equity accounts, such as common stock and retained earnings.
This avoids misrepresenting transactions that distort actual results of the parent company and subsidiary.