Manchester Corporation, a U.S. corporation, incurred $100,000 of interest expense during 2017. Manchester manufactures inventory that is sold within the United States and abroad. The total tax book value and fair market value of its U.S. production assets is $20,000,000 and $50,000,000, respectively. The total tax book value and fair market value of its foreign production assets is $5,000,000 and $10,000,000, respectively. What is the minimum amount of interest expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation?

Question

Quizplus · Accepted Answer

The interest expense is apportioned based on the ratio of foreign assets to total assets. The fair market value of foreign assets is $10,000,000 and total assets are $60,000,000 ($50,000,000 U.S. + $10,000,000 foreign). The ratio is 10/60, so $100,000 * (10/60) = $16,667. However, the minimum amount is based on the tax book value ratio, which is $5,000,000 foreign out of $25,000,000 total, or 20%. Thus, $100,000 * 20% = $20,000.