Beta Corporation acquires 90 percent of Gamma Corporation’s voting stock on February 1, 2009, for $170 million in cash. Gamma’s net assets are fairly reported at $750 million at the date of acquisition. During 2009, Beta sells $800 million in merchandise to Gamma at a markup of 15 percent on cost. Gamma still holds $160 million of this merchandise in its ending inventory. Also during 2009, Gamma sells $190 million in merchandise to Beta at a markup of 10 percent on cost. Beta still holds $70 million of this merchandise in its ending inventory. Gamma reports 2009 net income of $80 million.

Required:

Calculate Beta’s equity in Gamma’s net income for 2009.

Assume Beta reports total 2009 sales revenue and cost of sales of $1,000 million and $800 million, respectively, while Gamma reports total 2009 sales revenue and cost of sales of $900 million and $720 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.