Madrid Corporation is a 100 percent owned Spanish subsidiary of Doubloon Corporation,a U.S.corporation.Madrid had post-1986 earnings and profits of €4,200,000 and post-1986 foreign taxes of $2,700,000.During the current year,Madrid paid a dividend of €2,100,000 to Doubloon.Assume an exchange rate of €1 = $1.50.Compute the tax consequences to Doubloon as a result of this dividend.

Question

Quizplus · Accepted Answer

The taxable income to Doubloon from Madrid's dividend is calculated by multiplying the dividend paid (€2,100,000) by the exchange rate ($1.50) to get $3,150,000.

Since Madrid had post-1986 foreign taxes of $2,700,000, Doubloon can claim a deemed paid foreign tax credit of this amount.

Therefore, the taxable income to Doubloon is $3,150,000 and the deemed paid foreign tax credit is $2,700,000, resulting in a net tax liability of $450,000 ($3,150,000 - $2,700,000).

Option D is the correct answer, as it reflects this calculation.

Madrid Corporation Is a 100 Percent Owned Spanish Subsidiary of Doubloon