Petrodat Company provides data processing services for companies operating in the petroleum extraction business. On January 1, Year 1, Petrodat established two foreign subsidiaries€”one in Mexico and the other in Venezuela€”by investing $100,000 worth of data processing equipment in each. The opening balance sheets for the two subsidiaries in local currency appear as follows:

The equipment is depreciated on a straight-line basis over a five-year useful life with no residual value.
The Year 1 income statement for each subsidiary appears as follows:

Revenues and other expenses occurred evenly throughout the year and were realized in cash by year-end. As a result, the balance sheets for the two companies at December 31, Year 1, appear as follows:

For Year 1, the two subsidiaries reported the following measures of profitability:

Values for the general price index in Mexico and Venezuela during Year 1 were as follows:

Required:
a. For each subsidiary, restate Year 1 income for changes in the general price index. Include a purchasing power gain or loss. Ignore income taxes.
b. Calculate Year 1 profit margin and return on assets for each subsidiary on an inflation-adjusted basis.
c. Comment on the impact of inflation on the comparison of profitability measures across operations located in countries with different levels of inflation.

Mexico Venezuela (pesos (bolivars) Machinery and equipment.... Total assets Contributed capital Total owners' equity. 1,000,000 150,000,000 1,000,000 150,000,000 Merico (pesos) 400,000 (200,000) (30,000,000) (150.000) (22.500.000) 50000 1500.000 Venezuela (bolivars) 60,000,000 Revenues. Depreciation expense Other expenses. Net income... Mexico Venezuela (pesos (bolivars) Cash Machnery and equipment Less: Accumulated depreciation Total assets 250,000 37,500,000 1,000,000 50,000,000 050.000 157.500.000 Contributed capital.1,000,000 150,000,000 200000 (30.000.000) 50000 1500.000 Retaned eanings Total equity 050.000 157.500.000 Mexico Venezuela Profit margin (net income revenues) Return on equity (net income average total stockholders' 12.5%. 12.5% 4.88% 4.88% Mexico Venezuela January 1 Average December 31 100 105 110 100 110 120