Arthur Inc. $($Arthur$)$ owns $80\%$ of Haddon Inc. $($Haddon$).$ During $2023,$ Arthur sold inventory to Haddon for $$10,000.$ Half $(50\%)$ of this inventory remained in Haddon's warehouse at year end.

Haddon sold inventory to Arthur for $$5,000.40\%$ of this inventory remained in Arthur's warehouse at year end.

Both companies are subject to a tax rate of $40\%.$ The gross profit percentage on sales is $20\%$ for both companies. Unless otherwise stated, assume Arthur uses the cost method to account for its investment in Haddon.

Assuming that Arthur used the equity method instead of the cost method, what adjustment would have to be made to the investment in Haddon account to adjust for any unrealized profits on Haddon's sales to Arthur?

Multiple Choice

No adjustment would be required.

The account would have to be reduced by $$240.$

The account would have to be reduced by $$192.$

The account would have to be reduced by $$48.$