Harcker Corporation acquires 40 percent of Jackson Corporation's voting stock on January 3, 2017, for \($40\) million in cash. Jackson's net assets were fairly reported at \($100\) million at the date of acquisition. During 2017, Harcker sells \($130\) million in merchandise to Jackson at a markup of 30 percent on cost. Jackson still holds \($26\) million of this merchandise in its ending inventory. Also during 2017, Jackson sells \($54\) million in merchandise to Harcker at a markup of 20 percent on cost. Harcker still holds \($12\) million of this merchandise in its ending inventory. Jackson reports 2017 net income of \($10\) million.

Required

a. Calculate Harcker's equity in Jackson's net income for 2017.

b. Assume Harcker reports total 2017 sales revenue and cost of sales of \($310\) million and \($262\) million, respectively, while Jackson reports total 2017 sales revenue and cost of sales of \($254\) million and \($235\) million, respectively. Compute each company's gross margin on sales as reported following U.S. GAAP. Now compute gross margin on sales again, excluding intercompany sales. Comment on the results.