Iota Corporation acquires 50 percent of Kappa Corporation’s voting stock on June 1, 2017, for $90 million in cash. Kappa’s net assets are fairly reported at $350 million at the date of acquisition. During 2017, Iota sells $400 million in merchandise to Kappa at a markup of 30 percent on cost. Kappa still holds $80 million of this merchandise in its ending inventory. Also during 2017, Kappa sells $110 million in merchandise to Iota at a markup of 15 percent on cost. Iota still holds $30 million of this merchandise in its ending inventory. Kappa reports 2017 net income of $40 million.

Required:

Calculate Iota’s equity in Kappa’s net income for 2017.

Assume Iota reports total 2017 sales revenue and cost of sales of $600 million and $480 million, respectively, while Kappa reports total 2017 sales revenue and cost of sales of $500 million and $420 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.