Shannon Peed

SU12020

ACC 430

Assignment 1

Chapter 1 Problem 3:
A) Explain how Acme Brush of Brazil’s pretax income (in BRL) became a U.S. dollar pretax
loss.

The pretax income of Acme Brush of Brazil became a U.S dollar pretax loss due to the
conversion from Brazilian Real to USD. The conversion in this problem is 3.3 Brazilian
Real to every 1 USD. Thus the 500 gain in BRL is a loss of 300 USD.

B) Discuss whether Cooper should be paid a bonus or not.

The bonus varies from company to company. Since the bonus is calculated from the pre-
tax income then Cooper Grant should be paid a bonus. Cooper Grant is in charge of the
Brazil subsidiary of Acme Brush so he is in the positive in his market. Unless a stipulation
is stated in his contract about having a positive pre-tax income in the parent company’s
country then he should be getting paid his bonus.

Chapter 2 Case 2-2:

1. With respect to the adjustments related to goodwill, answer the following:
a. Why does the adjustment for goodwill amortization increase net income under
Country A GAAP but decrease net income under Country B GAAP?

Country A does not have an amortization expense with the adjustment for the
goodwill amortization. Thus the net income increases because the expense that
was recognized is revered and added back into the net income.
 Country B does have an amortization expense. Country B amortized over 5 years
and SKD amortized goodwill over 20 years. This being said the net income for
Country B is decreased because the amortized expense must be recognized.

b. Why does the goodwill adjustment increase stockholders’ equity in Country A

but decrease stockholders’ equity in Country B?

Goodwill affects stockholders’ equity, thus if there is no amortized expense for

goodwill allowing for an increased goodwill for Country A then there will be an
increase in the stockholders’ equity in said country.

With this being said Country B had a lowered goodwill because of the amortized
expense it had. With the lower goodwill leads to a decrease stockholders’ equity
in Country B.

c. Why are the adjustments to stockholders’ equity larger than the adjustments to
income?

When it comes to adjustments to income all adjustments are only shown for the
current financial year for the company. When it comes to adjustments to
stockholder’s equity it is not restricted to the current financial year thus it is
cumulative from previous financial years and the current financial year. This
being said the adjustments to income will more than likely always be a smaller
amount than that of stockholders’ equity.

2. With respect to the adjustments made by the analyst in Country A related to interest,
answer the following:
a. Why are there two separate adjustments to income related to interest?

There are two separate adjustments to income related to interest because one is
capitalized and on is depreciated. Capitalized Interest as it is labels is the interest
that is capitalized. Depreciation related to capitalized interest is the depreciation
of the capitalized interest.

b. Why does the adjustment to income for capitalized interest increase income,
whereas the adjustment for depreciation related to capitalized interest
decreases income?
 The adjustment to income for the capitalized interest increased because the
interest is being capitalized so it is not being expensed immediately. This
increased the income because there is no expense being taken out of the income
right away.

The adjustment for the depreciation related to capitalized interest decreases

income because the depreciation of the capitalized interest is finally being
expensed. Because of this the income is decreased from the expense.

3. With respect to the adjustments made by the analyst in Country B related to fixed
assets, answer the following:
a. Why does the adjustment for depreciation related to revalued fixed assets
decrease income, whereas the adjustment for revaluation of fixed assets
increases stockholders’ equity?

When fixed assets are revalued, their carrying value is increased to a larger
amount thus increasing the value of stockholders’ equity to ensure the balance
sheet is in fact balanced due to the larger depreciation expenses from the
revalued amount.