Epsilon Corporation acquires 30 percent of Zeta Corporation’s voting stock on April 1, 2019, for $70 million in cash. Zeta’s net assets are fairly reported at $250 million at the date of acquisition. During 2019, Epsilon sells $300 million in merchandise to Zeta at a markup of 30 percent on cost. Zeta still holds $60 million of this merchandise in its ending inventory. Also during 2019, Zeta sells $90 million in merchandise to Epsilon at a markup of 25 percent on cost. Epsilon still holds $18 million of this merchandise in its ending inventory. Zeta reports 2019 net income of $30 million.

Required:

Calculate Epsilon’s equity in Zeta’s net income for 2019.

Assume Epsilon reports total 2019 sales revenue and cost of sales of $500 million and $400 million, respectively, while Zeta reports total 2019 sales revenue and cost of sales of $400 million and $320 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.