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.

What effect (if any) would Arthur's unrealized profits on its sales to Haddon have on the noncontrolling interest account on the consolidated balance sheet?

Multiple Choice

1. There would be a decrease to the non-controlling interest account for the amount of $120.

2. There would be an increase to the non-controlling interest account for the amount of $120.

3. There would be an decrease to the non-controlling interest account for the amount of $200.

4.There would be no effect.