Question

Cooper Grant is the president of Acme Brush of Brazil the wholly owned Brazilian 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 real [BRL]):
Sales . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . Pretax income . . . . . . . . . . . . . . . . .
BRL10,000 9,500 BRL 500
After translating the Brazilian real income statement into U.S. dollars, the condensed 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:
a) Explain how Acme Brush of Brazil’s pretax income (in BRL) became a U.S.-dollar pretax loss.
The Acme Brush of Brazil pre tax income in BRL became a United States dollar pretax loss because the dollar if financially stronger as compared to the BRL; this is the reason as to why it became a United States dollar pretax loss.
b) Discuss whether Cooper Grant should be paid a bonus or not.
Cooper Grant ought to be paid a bonus mostly due to the simple fact that as the wholly owned Brazilian subsidiary of the United States based Acme Brush and as such they ought to be paid a compensation which consists of both a bonus as well as a salary. Another factor is that they also tend to incur a pretax loss as a result of translating the Brazilian Real each time they are compensated without the bonus (Saudagaran, 2009).

Answer 1

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