Theta Corporation acquires 40 percent of Lambda Corporation’s voting stock on May 1, 2018, for $80 million in cash. Lambda’s net assets are fairly reported at $300 million at the date of acquisition. During 2018, Theta sells $350 million in merchandise to Lambda at a markup of 35 percent on cost. Lambda still holds $70 million of this merchandise in its ending inventory. Also during 2018, Lambda sells $100 million in merchandise to Theta at a markup of 20 percent on cost. Theta still holds $25 million of this merchandise in its ending inventory. Lambda reports 2018 net income of $35 million.

Required:

Calculate Theta’s equity in Lambda’s net income for 2018.

Assume Theta reports total 2018 sales revenue and cost of sales of $550 million and $450 million, respectively, while Lambda reports total 2018 sales revenue and cost of sales of $450 million and $360 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.