Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle,Thomas Schaefer,Timothy Doupnik

Exercise 24

Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2013, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2013.
How should Perez report the effect of the intra-entity sale on its 2013 income statement
a. Sales and cost of goods sold should be reduced by the amount of intra-entity sales.
b. Sales and cost of goods sold should be reduced by 25 percent of the amount of intra-entity sales.
c. Investment income should be reduced by 25 percent of the gross profit on the amount of intra-entity sales.
d. No adjustment is necessary.