Chapter 1, Problem 10P

Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2018, Perez sold goods with a 40 percent gross profit to Senior, which sold all of these goods in 2018. How should Perez report the effect of the intra-entity sale on its 2018 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.