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 10,000
Expenses ....……..……………………… 9,500 BRL
Pre-tax income ……..………………….. 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$3,000
Expenses ……..……………………… 3,300
Pre-tax income (loss) ……..…………. US$ (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.