Final answer:
In the consolidated financial statements for 2013, the equipment sold by a subsidiary to its parent at the beginning of 2012 should be reported with a book value of $240,000, which is its original book value less cumulative depreciation for two years, and any intra-group profits should be eliminated.
Step-by-step explanation:
At the beginning of 2012, a subsidiary sold equipment with a book value of $400,000 to its parent company for $500,000. Given that the sale was within the same group of companies, and the equipment had a remaining life of 5 years, for consolidated financial statements purposes, the transaction must be adjusted to eliminate any intra-group profit and to reflect the economic reality of the group as a single entity.
By the end of 2013, which is two years after the sale, the equipment would have been depreciated for two years. Since the equipment had a remaining life of five years at the time of sale, the straight-line depreciation per year is $400,000 / 5 years = $80,000. For two years, this amounts to $80,000 x 2 = $160,000. The book value that should be recognized on the consolidated balance sheet at the end of 2013 is the original book value minus two years of depreciation, which is $400,000 - $160,000 = $240,000. The intra-group profit of $100,000 ($500,000 sale price - $400,000 book value) should also be eliminated.