Alpha Corporation acquires 35 percent of Beta Corporation’s voting stock on February 1, 2021, for $50 million in cash. Beta’s net assets are fairly reported at $150 million at the date of acquisition. During 2021, Alpha sells $200 million in merchandise to Beta at a markup of 25 percent on cost. Beta still holds $40 million of this merchandise in its ending inventory. Also during 2021, Beta sells $70 million in merchandise to Alpha at a markup of 15 percent on cost. Alpha still holds $15 million of this merchandise in its ending inventory. Beta reports 2021 net income of $20 million.

Required:

Calculate Alpha’s equity in Beta’s net income for 2021.

Assume Alpha reports total 2021 sales revenue and cost of sales of $400 million and $300 million, respectively, while Beta reports total 2021 sales revenue and cost of sales of $300 million and $250 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.