Final answer:
For consolidated financial statements, the equipment sold by a parent company to its subsidiary should be reported at the parent's original cost, minus any accumulated depreciation, not the inflated purchase price paid by the subsidiary.
Step-by-step explanation:
The question relates to the correct reporting of a transaction between a parent company and its subsidiary in consolidated financial statements. On January 1, 2014, the parent company sold equipment with a book value of $600,000 to the subsidiary for $1,000,000. The equipment had a remaining useful life of 10 years, with a straight-line depreciation method being used. For consolidated financial statements, intercompany profits must be eliminated. Thus, the equipment must be reported at the parent's book value, not the inflated subsidiary purchase price. By the end of 2014, the equipment would be reported at $600,000 minus one year of depreciation ($600,000/10 years = $60,000), resulting in a net book value of $540,000. The correct answer is option d): The equipment should be reported at its original cost of $600,000, net of accumulated depreciation.
The equipment (net of accumulated depreciation) should be reported at its original cost of $600,000, net of accumulated depreciation. This means that the equipment's value on the consolidated balance sheet at December 31, 2014, should be $600,000 minus any accumulated depreciation that has been recorded over the year.
Since the equipment had a remaining life of 10 years at the time of sale, straight-line depreciation would result in an annual depreciation expense of $60,000 ($600,000 divided by 10 years). Assuming that there has been no additional depreciation recorded during the year, the net value of the equipment should be $600,000 minus $60,000, which equals $540,000.