accounting question 335

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 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 ]):

Sales . . … . . …. . ..BRL 10000.. . … .

Expenses …………….. .9500

Pre-tax income …… .. 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 …… . ….. . …. . ….US$3000 . .

Expenses ……………….. .3300

Pre-tax income (loss) .. .. . US$(300). . . .. . .

Required:

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

pretax loss.

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