1. CooperGrantisthepresidentofAcmeBrushofBrazilthewhollyownedBrazilian subsidiary of U.S.-based Acme Brush Inc. Cooper Grants 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]):

Introduction to International Accounting 17

Sales . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . Pretax income . . . . . . . . . . . . . . . . .

BRL10,000 9,500 BRL 500

After translating the Brazilian real income statement into U.S. dollars, the con- densed income statement for Acme Brush of Brazil appears as follows (amounts in thousands of U.S. dollars [US$]):

Sales . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . Pretax income (loss) . . . . . . . . . . . . .

US$3,000 3,300

US$ (300)

Required:

1. Explain how Acme Brush of Brazils pretax income (in BRL) became a U.S.-dollar pretax loss.

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