Final answer:
On the consolidated balance sheet, the equipment would be reported at a value of $204,000 as of December 31, 2012, after adjusting for both Sub's and Parent's depreciation and eliminating intercompany profits.
Step-by-step explanation:
Consolidated Financial Statements: Reporting and Income Recognition
When considering the sale of equipment from Sub to Parent within a consolidated entity, adjustments must be made to eliminate intercompany profits and reflect the correct value of the assets. The equipment was originally purchased by Sub for $400,000 and had accumulated depreciation of $160,000, making its book value at the time of sale $240,000 ($400,000 - $160,000). However, the equipment was sold to Parent for $300,000, resulting in a $60,000 intercompany profit ($300,000 - $240,000).
Since the sale took place with a remaining useful life of 5 years, the equipment would be depreciated over that period using the straight-line method, which means an annual depreciation expense of $60,000 ($300,000 / 5 years). However, for the purposes of consolidated financial statements, the intercompany profit must be eliminated. Therefore, after 3 years, $180,000 of the cost has been depreciated on Parent's books, but $36,000 of intercompany profit must be removed ($60,000 intercompany profit / 5 years * 3 years).
On the consolidated balance sheet as of December 31, 2012, the equipment should appear at its original cost of $400,000, less the total accumulated depreciation of $196,000 (including both Sub's and Parent's depreciation, minus intercompany profit), which equals $204,000. On the consolidated income statement, the depreciation expense for the current year should reflect the adjusted figure that excludes any intercompany profit.