Jenkin Corporation reported the following for its first two taxable years. Assume that the tax rates for both the years are the same. $\begin{array}{llr}
& \text { Year 1}&\text { Year 2}\
\text { U.S. source income } & 500,000 & \$ 600,000\
\text { Foreign source income } & 200,000 & 400,000\
\text {Taxable income } &\$700,000 & \$ 1,000,00\
\text { Foreign tax paid } &\$80,000 & \$ 50,000\
\end{array}$
Calculate Jenkin's U.S. tax liability for Year 2. Assume Jenkin's foreign source income does not qualify as foreign-derived intangible income.

Question

Jenkin Corporation reported the following for its first two taxable years. Assume that the tax rates for both the years are the same. $\begin{array}{llr}
& \text { Year 1}&\text { Year 2}\
  \text { U.S. source income } & 500,000 & \$ 600,000\
 \text { Foreign source income } & 200,000 & 400,000\
 \text {Taxable income  } &\$700,000 & \$  1,000,00\
 \text { Foreign tax paid } &\$80,000 & \$ 50,000\
\end{array}$
 Calculate Jenkin's U.S. tax liability for Year 2. Assume Jenkin's foreign source income does not qualify as foreign-derived intangible income.

Quizplus · Accepted Answer

To calculate Jenkin’s U.S. tax liability for Year 2, we need to add the taxable income for Year 2 to the taxable income for Year 1, and then apply the tax rate to the combined taxable income.

Taxable income Year 1 = $300,000
Taxable income Year 2 = $500,000

Combined taxable income = $800,000
Tax rate = 35%

U.S. tax liability for Year 2 = Combined taxable income x Tax rate
= $800,000 x 35%
= $280,000

However, since we need to find the U.S. tax liability for Year 2 only, we need to deduct the U.S. tax paid in Year 1 from the total.

U.S. tax liability for Year 1 = Taxable income Year 1 x Tax rate
= $300,000 x 35%
= $105,000

Therefore, Jenkin’s U.S. tax liability for Year 2 = U.S. tax liability for Year 2 - U.S. tax paid in Year 1
= $280,000 - $158,000
= $122,000

Hence, the best choice is C.

Jenkin Corporation Reported the Following for Its First Two Taxable