Petrodat Company provides data processing services for companies operating in the petroleum extraction business. On January 1,

Question:

Petrodat Company provides data processing services for companies operating in the petroleum extraction business. On January 1, Year 1, Petrodat established two foreign subsidiaries€”one in Mexico and the other in Venezuela€”by investing $100,000 worth of data processing equipment in each. The opening balance sheets for the two subsidiaries in local currency appear as follows:

The equipment is depreciated on a straight-line basis over a five-year useful life with no residual value.
The Year 1 income statement for each subsidiary appears as follows:

Revenues and other expenses occurred evenly throughout the year and were realized in cash by year-end. As a result, the balance sheets for the two companies at December 31, Year 1, appear as follows:

For Year 1, the two subsidiaries reported the following measures of profitability:

Values for the general price index in Mexico and Venezuela during Year 1 were as follows:

Required:
a. For each subsidiary, restate Year 1 income for changes in the general price index. Include a purchasing power gain or loss. Ignore income taxes.
b. Calculate Year 1 profit margin and return on assets for each subsidiary on an inflation-adjusted basis.
c. Comment on the impact of inflation on the comparison of profitability measures across operations located in countries with different levels of inflation.