Owl Vision Corporation (OVC) is a North Carolina corporation engaged in the manu

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 $150 million, of which $120 million generated U.S. source income and $30 million generated foreign source income. The average fair market value of OVC’s assets was $180 million, of which $135 million generated U.S. source income and $45 million generated foreign source income. OVC’s total interest expense was $15 million. (Enter your answers in millions.)

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.)

interest income

Explanation / Answer

Solution: $3,750,000

Working:

Apportionment using fair market value

Fair market value of U.S. assets = $135 million

Fair market value of foreign assets = $45 million

Interest apportioned to U.S. source income: $135,000,000/$180,000,000 * $15 million = $11.25 million = $11,250,000

Interest apportioned to foreign source income: $45,000,000/$180,000,000* $15 million = $3.75 million = $3,750,000

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