I came across a problem that gives us the parent company’s balance sheet and then gives us that it owns a sub which as no debt but has $5K in non-current assets which is reflected on the parent’s balance sheet. It asks us to calculate adjusted leverage after removing the sub’s effect on the parent’s balance sheet. The answer was to lower Assets and Equity by the 4K and then recalculate leverage. Simple enough- but my question is why exactly is equity lowered?
My understanding- so if the sub’s assets are on the parent’s balance sheet we are looking at a consolidated balance sheet so assets are clearly reduced by the $4K- I get that. What exactly is the explanation for reducing EQ by the same amount?