Question

1. CooperGrantisthepresidentofAcmeBrushofBrazilthewhollyownedBrazilian subsidiary of U.S.-based Acme Brush Inc. Cooper Grant’s compensation package consists of a combination of salary and bonus. His annual bonus is calculated as a predetermined percentage of the pretax annual income earned by Acme Brush of Brazil. A condensed income statement for Acme Brush of Brazil for the most recent year is as follows (amounts in thousands of Brazilian reals [BRL]):

Introduction to International Accounting 17

Sales . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . Pretax income . . . . . . . . . . . . . . . . .

BRL10,000 9,500 BRL 500

After translating the Brazilian real income statement into U.S. dollars, the con- densed income statement for Acme Brush of Brazil appears as follows (amounts in thousands of U.S. dollars [US$]):

Sales . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . Pretax income (loss) . . . . . . . . . . . . .

US$3,000 3,300

US$ (300)

Required:

1. Explain how Acme Brush of Brazil’s pretax income (in BRL) became a U.S.-dollar pretax loss.

2. Discuss whether Cooper Grant should be paid a bonus or not.

Answer 1

Hey,

Acme Brush is a Brazil-based Company doing its business in local currency (BRL). Our Local currency is US$. As this company is our subsidiary we need to consolidate its financial statements with our financial statements. In order to consolidate its financial statement, we need to translate Acme Brush's Financial statements into the Dollar amount. so when we translate due to changes in foreign currency Exchange rate this situation may occur. Translation of Income statement items is done using Spot Rate on the date of the transaction.

Sales would have been done when the exchange rate would have been 0.3 per BRL (3000/10000)

Expenses would have been done when the exchange rate would have been 0.35 Per BRL (3300/9500)

Bonus Was Payable on the Pre Tax Income Earned by Acme Brush, Company is Brazil Based company and it has earned Profit on individual Bases. Consolidation is done to show the combined picture of the Performance of the company as a whole, it is just for information to investors Holding Company. Consolidation does not affect individual performance of respective companies. Thus Bonus shall be payable to Cooper Grant by Acme Brush