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Frequently Asked Questions
Downstream sales go from parent to subsidiary; upstream go from subsidiary to parent. The key difference is where unrealized profit elimination affects NCI. Upstream sales require allocating the unrealized profit elimination between controlling and noncontrolling interests. Downstream profits are fully attributable to the parent.
Eliminate the gross profit on inventory still held by the purchasing affiliate at period end. Debit cost of goods sold (or retained earnings for beginning inventory) and credit inventory. The amount is the markup percentage times ending intercompany inventory. Don't forget the tax effect if applicable.
When one affiliate holds another's bonds, eliminate the investment in bonds against the bonds payable. Any difference creates a constructive gain or loss recognized in consolidated income. The premium/discount amortization from both sides is also eliminated.
The equity method produces the same net income and retained earnings as consolidation—just with one-line presentation instead of full detail. This is called the "one-line consolidation." Understanding equity method mechanics helps you verify consolidation answers.