Sobrero Corporation

1. 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, compris- ing 80 percent of the original purchase price (balance attributed to land), has an esti- mated 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.

Required:

1. 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.

2. Compare and evaluate the information content of rate-of-return statistics com- puted using each of these models.