Perez, Inc., applies the equity method for its $25$ percent investment in Senior, Inc. During $2021,$ Perez sold goods with a $40$ percent gross profit to Senior, which sold all of these goods in $2021.$ How should Perez report the effect of the intra$-$entity sale on its $2021$ income statement?

Multiple Choice

Sales and cost of goods sold should be reduced by $25$ percent of the amount of intra$-$entity sales.

No adjustment is necessary.

Sales and cost of goods sold should be reduced by the amount of intra$-$entity sales.

Investment income should be reduced by $25$ percent of the gross profit on the amount of intra$-$entity sales.