Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during 2014. 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 calculation of interest expense apportioned to foreign source income for foreign tax credit purposes is based on the ratio of the average value of foreign production assets to the average value of total production assets. The average value of foreign production assets is ($20,000,000 - $60,000,000) ÷ 2 = -$20,000,000 ÷ 2 = -$10,000,000. Since the average value of foreign production assets is negative, it is treated as zero for purposes of the apportionment calculation. Therefore, the ratio is ($20,000,000 - $5,000,000) ÷ 2 ÷ ($20,000,000 - $5,000,000 + $20,000,000 - $60,000,000) ÷ 2 = $7,500,000 ÷ $22,500,000 = 33.33%. The amount of interest expense apportioned to foreign source income is 33.33% × $300,000 = $100,000.