Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during2017. Hanover manufactures inventory that is sold within the United States and abroad. The total tax book value and fair market value of its production assets is $20,000,000 and $60,000,000, respectively. The total tax book value and fair market value of itsforeign production assets is $5,000,000 and $20,000,000, 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 minimum amount of interest expense that can be apportioned to foreign source income for foreign tax credit purposes is determined using the following formula:
Interest Expense Apportionment Ratio = Foreign Production Asset Fair Market Value / Total Production Asset Fair Market Value
In this case, the Interest Expense Apportionment Ratio is ($20,000,000 / $60,000,000) = 1/3. Therefore, the amount of interest expense that can be apportioned to the company's foreign source income is ($300,000 x 1/3) = $75,000.