Question
In: Accounting
Owl Vision Corporation (OVC) is a North Carolina corporation engaged in the manufacture and sale of...
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
Solutions
Expert Solution
| 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. | ||||
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