1. Colper Grant is the president of Acme Brush of Brazil, the whole owned Brazil
ID: 2404895 • Letter: 1
Question
1. Colper Grant is the president of Acme Brush of Brazil, the whole owned
Braziliain Subsidiary of US 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 pre-tax 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)):
BRL
Sales 10,000
Expenses 9,500
Pre-tax income 500
After translating the Brazilian real income statement to the US dollars, the
condensed income statement for Acme Brush of Brazil appears as follows
(amounts in thousand of US Dollars (USD):
Sales 3,000
Expenses 3,300
Pre-tax loss -300
A. Explain how Acme Brush of Brazil's pre-tax income in BRL becamea US
dollar pretax loss. In order to receive the full credit, you are required
to show all steps in calculation.
B. Discuss whether Cooper Grant should be paid a bonus or not.
Explanation / Answer
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.
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