Mu Corporation acquires 55 percent of Nu Corporation’s voting stock on July 1, 2016, for $100 million in cash. Nu’s net assets are fairly reported at $400 million at the date of acquisition. During 2016, Mu sells $450 million in merchandise to Nu at a markup of 25 percent on cost. Nu still holds $90 million of this merchandise in its ending inventory. Also during 2016, Nu sells $120 million in merchandise to Mu at a markup of 10 percent on cost. Mu still holds $35 million of this merchandise in its ending inventory. Nu reports 2016 net income of $45 million.

Required:

Calculate Mu’s equity in Nu’s net income for 2016.

Assume Mu reports total 2016 sales revenue and cost of sales of $650 million and $520 million, respectively, while Nu reports total 2016 sales revenue and cost of sales of $550 million and $460 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.