Advanced Accounting 12th Edition by Joe Ben Hoyle,Thomas Schaefer , Timothy Doupnik

Exercise 8

Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2015, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2015. How should Perez report the effect of the intra-entity sale on its 2015 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.