Sobrero Corporation, a Mexican affiliate of a major U.S.-based hotel chain, starts the calendar year with 1 billion pesos (P) cash equity investment. It immediately acquires a refurbished hotel in Acapulco for P 900 million. Owing to a favorable tourist season, Sobrero Corporation’s rental revenues were P 144 million for the year. Operating expenses of P 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 yearend, 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.