Question

Owl Vision Corporation (OVC) is a North Carolina corporation engaged in the manufacture and sale of contact lenses and other optical equipment. The company handles its export sales through sales branches in Belgium and Singapore. The average tax book value of OVC’s assets for the year was $220 million, of which $176 million generated U.S. source income and $44 million generated foreign source income. The average fair market value of OVC’s assets was $264 million, of which $198 million generated U.S. source income and $66 million generated foreign source income. OVC’s total interest expense was $22 million. (Enter your answers in millions.)   a. What amount of the interest expense will be apportioned to foreign source income under the tax book value method? (Round your final answer to 1 decimal place.) b. What amount of the interest expense will be apportioned to foreign source income under the fair market value method? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) c. If OVC wants to maximize its foreign tax credit limitation, which method produces the better outcome?

Fair market value method

Tax book value method

Answer 1

		Owl Vision Corporation (OVC)
	Apportionment using tax book value	(amt in million)	Ratio
	Tax book value of U.S assets	176	(176/220)	80%
	Tax book value of foreign assets	44	(44/220)	20%
	Total	220
	OVC's Total Interest Expense	22
a)	Interest amount apportioned to U.S Source Income=($22000000*80%)	$ 1,76,00,000.00
	Interest amount apportioned to foreign assets=($22000000*20%)	$     44,00,000.00
	Total	$ 2,20,00,000.00
	Apportionment using fair value	(amt in million)	Ratio
	Tax book value of U.S assets	198	(198/264)	75%
	Tax book value of foreign assets	66	(66/264)	25%
	Total	264
	OVC's Total Interest Expense	22
b)	Interest amount apportioned to U.S Source Income=($22000000*75%)	$ 1,65,00,000.00
	Interest amount apportioned to foreign assets=($22000000*25%)	$     55,00,000.00
	Total	$ 2,20,00,000.00
c )	If OVC wants to maximize its foreign tax credit limitation,Tax book Value method will be used because foreign tax credit limitation ratio is higher in case of tax book value method.