Hanover Corporation,a U.S.corporation,incurred $300,000 of interest expense during 2017.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 its foreign 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 apportioned to foreign source income is based on the ratio of foreign assets to total assets using fair market value. The ratio is $20,000,000 (foreign) / $60,000,000 (total) = 1/3. Therefore, 1/3 of $300,000 interest expense is $100,000. However, the question asks for the minimum amount, which is based on the tax book value ratio: $5,000,000 (foreign) / $20,000,000 (total) = 1/4. Therefore, 1/4 of $300,000 is $75,000.