In a share purchase, what needs to be done with the parent's investment in the subsidiary?

In a share purchase, the correct treatment of the parent's investment in the subsidiary is to eliminate it from the financial statements during the consolidation process. This is done to avoid double counting, as the investment represents an ownership interest in the subsidiary. When preparing consolidated financial statements, the parent company combines its own financial results with those of the subsidiary, treating them as a single economic entity.

Elimination entries are essential because, under the consolidation method, intercompany transactions, including equity investments, must be removed to present a clear and accurate financial picture of the entire group. By eliminating the parent's investment from the consolidated financial statements, you ensure that the financial results reflect only the net assets and results of operations of the combined entities, without artificially inflating the assets or equity.

The other options do not correctly reflect the treatment of the investment. Reporting as cash flow does not apply in this context, as the investment does not directly impact cash flows during consolidation. Increasing the investment by the subsidiary's income is incorrect, as the parent company's investment should not be adjusted based on the subsidiary's performance to prevent misrepresentation of net assets. Recording the investment as a long-term asset on the consolidated balance sheet does not provide an accurate picture of the combined entity's financial position because it would