Thank you for your responses that shows me that I am not "nuts" and this is happening in schools. I wasn't giving up on the teacher but her bureaucratic response that what set me off. I would be much more understanding if she would say to me way before report card came - hey, I do know that your kid knows what we are teaching but this is how we suppose to grade them and my hands are tight. Let's think together how we can teach her above what she know without regards to her grades. But she chose to give me this answer that should calm me as "that" parent - that my kid is awesome with capital "A".
I did not talk to principal yet as I was waiting for two things to happened: one is for her teacher to realize that she (DD) is underchallenged based on her grades and second is to see results of her MAP testing that should come back soon. Since thing one ain't happening I will wait for thing two to come back so that with her grades and tests scores I can continue to advocate. I don't want to go now as I already had little push back from administration and support team based on the fact that she was already skipped and supposevly getting as much as she needed in their eyes. Not many kids get this in our school.
My mistake was that I was hesitant to push further due to high expectations regarding this particular teacher but now I know where we stand.