Adam Ltd. owns 80% of the outstanding shares of Bob Ltd. Adam Ltd. also owns 70% of the shares of Xena Ltd. During the year 20X5, Adam sold $500,000 (cost) of goods (widgets) to Bob at a 60% markup. Xena sold $400,000 (cost) of goods (gadgets) to Adam at a 50% markup.

Adam sold a piece of land (cost $100,000) to Bob for $60,000.

On October 1, 20X5, Xena sold land (cost $80,000) and a building (cost $110,000) to Adam for $400,000; 40% of the price was allocated to land, and 60% of the price was allocated to building. The building had five years of expected life at October 1, 20X5, and was 30% depreciated at that time.

The $400,000 was unpaid at year-end and Adam had agreed to pay $10,000 interest on the unpaid amount.

An inventory count showed that 20% of the widgets that Bob had purchased from Adam were unsold at December 31, 20X5; 70% of the gadgets that Adam had purchased from Xena were also unsold.

Required

Assume that Adam Ltd. uses the cost method of keeping its accounts.

1. Prepare the consolidation-related eliminations that would be required at December 31, 20X5, to prepare the consolidated financial statements.

2. Calculate the effect on the non-controlling interest. By how much would the income to each non-controlling interest be changed? Keep the two subsidiaries separate.