Harcker Corporation acquires 40 percent of Jackson Corporation's voting stock on January 3, 2014, for $40 million in cash. Jackson's net assets were fairly reported at $100 million at the date of acquisition. During 2014, Harcker sells $65 million in merchandise to Jackson at a markup of 30 percent on cost. Jackson still holds all of this merchandise in its ending inventory. Also during 2014, Jackson sells $54 million in merchandise to Harcker at a markup of 35 percent on cost. Harcker still holds all of this merchandise in its ending inventory. Jackson reports 2014 net income of $30 million.
Required
a. Calculate Harcker's equity in Jackson's net income for 2014.
b. Assume Harcker reports total 2014 sales revenue and cost of sales of $131 million and $110 million, respectively, while Jackson reports total 2014 sales revenue and cost of sales of $264 million and $229 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 transactions. Comment on the results.