Final answer:
The parent's equity in the net income of the subsidiary is shown on the consolidated income statement as part of the net income attributable to the parent and impacts retained earnings on the consolidated balance sheet.
Step-by-step explanation:
In consolidated financial statements, the parent's equity in the net income of the subsidiary appears on the consolidated income statement as part of the net income attributable to the parent company. This figure reflects the parent company's share of the profits of its subsidiary after all expenses and taxes have been accounted for. Since the subsidiary is a separate entity, its own equity is not directly shown on the parent's balance sheet. Instead, the investment in the subsidiary is reported as an asset on the parent's balance sheet, and the subsidiary's net income is included in the parent company's income statement as an equity in income of the subsidiary, which eventually impacts the retained earnings on the equity side of the consolidated balance sheet.
The consolidation process involves adjusting entries to eliminate the effects of inter-company transactions and balances. This is necessary to present a single set of financial statements that represents the consolidated entity as if it were a single economic entity. Keep in mind that while dividends from the subsidiary to the parent appear on the consolidated income statement, the stock and bond values themselves do not show up in the current account of the balance of payments.