Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during 2016. 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 interest expense that can be apportioned to the foreign source income is the total interest expense (300,000) multiplied by the ratio of foreign production assets fair market value to the total production assets fair market value. This gives:

($20,000,000 + $20,000,000) / ($60,000,000) = 2/6

Therefore, the interest expense apportioned to the foreign source income is:

$300,000 x 2/6 = $100,000

Thus, the correct answer is choice (C).