Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2011, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2011.

How should Perez report the effect of the intra-entity sale on its 2011 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 intraentity sales.

d. No adjustment is necessary.