Gamma Corporation acquires 45 percent of Delta Corporation’s voting stock on March 1, 2020, for $60 million in cash. Delta’s net assets are fairly reported at $200 million at the date of acquisition. During 2020, Gamma sells $250 million in merchandise to Delta at a markup of 20 percent on cost. Delta still holds $50 million of this merchandise in its ending inventory. Also during 2020, Delta sells $80 million in merchandise to Gamma at a markup of 10 percent on cost. Gamma still holds $20 million of this merchandise in its ending inventory. Delta reports 2020 net income of $25 million.

Required:

Calculate Gamma’s equity in Delta’s net income for 2020.

Assume Gamma reports total 2020 sales revenue and cost of sales of $450 million and $360 million, respectively, while Delta reports total 2020 sales revenue and cost of sales of $350 million and $290 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.