normalization-solution.js

var input = {
  '1': {
    id: 1,
    name: 'John',
    children: [{
        id: 2,
        name: 'Sally'
      },
      {
        id: 3,
        name: 'Mark',
        children: [{
          id: 4,
          name: 'Harry'
        }]
      }
    ]
  },
  '5': {
    id: 5,
    name: 'Mike',
    children: [{
      id: 6,
      name: 'Peter'
    }]
  }
};

function normalize(input) {
  var keys = Object.keys(input);

  return keys.reduce(function(acc, key) {
    if (!acc[key]) {
      acc[key] = input[key];
    }

    flattenChild(acc[key], acc);

    return acc;
  }, {});
}

function flattenChild(obj, parent) {
  if (!obj.children) {
    return;
  }

  obj.children.forEach(function(value, index) {
    parent[value.id] = value;
    obj.children[index] = value.id;

    flattenChild(value, parent);
  });
}

console.log(normalize(input));