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.
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