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ACCT 311 ACCT311 ACCT/311 Ch 24 Practice Exercises.docx

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ACCT 311 ACCT311 ACCT/311 Ch 24 Practice Exercises.docx

Spartan Corporation, a U.S. corporation, reported $2 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent.
Required:

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ACCT 311 ACCT311 ACCT/311 Ch 24 Practice Exercises.docx

Spartan Corporation, a U.S. corporation, reported $2 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent.
Required:
1.a.If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U.S. and foreign) on the $2 million of branch profits?
2.b. Assume the United States allows U.S. corporations to exclude foreign source income from U.S. taxation. What would be the total tax on the $2 million of branch profits?
3.c. Assume the United States allows U.S. corporations to claim a deduction for foreign income taxes. What would be the total tax on the $2 million of branch profits?
4.d-1. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be the total tax on the $2 million of branch profits?
5.d-2. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be your answer if Spartania taxed branch profits at 30 percent?
(For all requirements, enter your answers in dollars andnot in millions of dollars.)
a.Total tax $720,000
b.Total tax $300,000
c.Total tax $657,000
d-1.Total tax $420,000
d-2.Total tax $600,000
Explanation
a.Spartania tax ($2,000,000 × 15%) $300,000
U.S. tax ($2,000,000 × 21%) 420,000
Total tax $720,000
b.Spartania tax ($2,000,000 × 15%)$ 300,000
U.S. tax ($0 × 21%) 0
Total tax $300,000
c.Spartania tax ($2,000,000 × 15%) $300,000
U.S. tax ([$2,000,000 – $300,000] × 21%) 357,000
Total tax $657,000
d-1.Spartania tax ($2,000,000 × 15%) $300,000
U.S. tax ([$2,000,000 × 21%] – $300,000) 120,000
Total tax $420,000
d-2.If Spartania taxed branch profits at 30 percent, the United States would allow the foreign tax to reduce the U.S. tax to zero, but the excess $180,000 would become a carryback or carryforward to a prior or future years.
Spartania tax ($2,000,000 × 30%) $600,000
U.S. tax ([$2,000,000 × 21%] – $600,000) (0)
Total tax $600,000
2. Waco Leather Inc., a U.S. corporation, reported total taxable income of $5 million. Taxable income included $1.5 million of foreign source taxable income from the company’s branch operations in Mexico.
All of the branch income is foreign branch income. Waco paid Mexican income taxes of $300,000 on its branch income.Compute Waco’s allowable foreign tax credit.
(Enter your answer in dollars and not in millions of dollars.)
Foreign tax credit$300,000
Explanation
Waco’s precredit U.S. tax is $1,050,000 ($5,000,000 × 21%).
The company’s foreign tax credit limitation is computed as:$1,500,000 / $5,000,000 × $1,050,000 = $315,000.
Waco’s allowable foreign tax credit is the full $300,000. Waco has an “excess foreign tax credit limitation” of $15,000, which can absorb foreign tax credit carryforwards from prior years.