Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2009, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2009. How should Perez report the effect of the intercompany sale on its 2009 income statement?

a. Sales and cost of goods sold should be reduced by the amount of intercompany sales.

b. Sales and cost of goods sold should be reduced by 25 percent of the amount of intercompany sales.

c. Investment income should be reduced by 25 percent of the gross profit on the amount of inter¬ company sales.

d. No adjustment is necessary.