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 reals [BRL]):
Sales BRL 10,000
Expenses 9,500
Pretax income 500

After translateing the Brazilian real income statement into US dollars, the condensed income statement for Acme Brush of Brazil appeas as follows: (amounts in thousands of US dollars)

Sales $3,000
Expenses 3,300
Pretax income (loss) (300)

1. Explain how Acme Brush of Brazil's pretx income (in BRL) became a US dollar pretax loss.
2. Discuss whether Cooper Grant should be paid a bonus or not.

Answer 1

Answer:

1) The pretax income of Acme Brush became a US dollar pretax loss because of spot rates and or the exchange rates meaning sales were made when the exchange rate was Less than the exchange rate when the expenses were paid. But the main difference between the two currencies is exchange rates.

2) Cooper Grant should be paid the annual bonus as it is payable to him because Acme Brush of Brazil made a profit and his Bonus is a predetermined percentage of the pretax income.

Explanation: