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 d. No adjustment is necessary. intra-entity sales.

Question

Business

Queen

27 December, 15:28

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 d. No adjustment is necessary. intra-entity sales.

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Mattie Morse · Answer 1

No adjustment is necessary

Explanation:

In group balance sheet consolidation, Portion of Unrealized Profit (PURP) adjustments are only necessary when the goods or part of the goods have not been sold on to third parties meaning that the profit on the goods have not been realized. Hence it is more like a movement of inventory within the group.

In the given scenario ''During 2018, Perez sold goods with a 40 percent gross profit to Senior, which sold all of these goods in 2018''

As long as the goods have all been sold out of the group, then the profit has been realized and there will be no need for PURP adjustment on consolidation