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 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$]): Sales US$ 3,000 Expenses 3,300 Pretax income (loss) US$ (300 ) Why did Acme Brush of Brazil’s pretax income (in BRL) become a U.S.-dollar pretax loss? Multiple Choice Because there was a mistake in calculating Pre-tax income in Brazil Because Sales and Expenses are translated at different exchange rates Because the accountant in charge of translating the Brazilian annual report made a mistake Because raw materials used in Acme Brush of Brazil production are much more expensive in the U.S.
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 | |
| Pre-tax income | BRL | 500 |
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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$]):
| Sales | US$ | 3,000 | |
| Expenses | 3,300 | ||
| Pretax income (loss) | US$ | (300 | ) |
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Why did Acme Brush of Brazil’s pretax income (in BRL) become a U.S.-dollar pretax loss?
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Because there was a mistake in calculating Pre-tax income in Brazil
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Because Sales and Expenses are translated at different exchange rates
-
Because the accountant in charge of translating the Brazilian annual report made a mistake
-
Because raw materials used in Acme Brush of Brazil production are much more expensive in the U.S.
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