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Financial statements using historical cost and cost constant dollar

Sobrero Corporation, a Mexican affiliate of a major U.S based hotel chain starts the calendar year with 1 billion pesos (MXP) cash equity investment. It immediately acquires a refurbished hotel in Acapulco for MXP 900 million. Owing to a favorable tourist season, Sobrero Corporation's rental revenues were MXP 144 million for the year. Operating expenses of MXP 86,400,000 together with rental revenues were incurred uniformly throughout the year. The building comprising 80 percent of the original purchase price (balance attributed to land), has an estimated useful life of 20 years and is being depreciated in straight line fashion. By year end, the Mexican consumer price index rose to 420 from an initial level of 263, averaging 340 during the year.

A. Prepare financial statements for Sobrero Corporation's first year of operations in terms of the historical cost model and the historical cost constant dollar model.

B. Compare and evaluate the information content of rate of return statistics computed using each of these models.

Solution Summary

The financial statements using historical cost and cost constant dollars are examined.