McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 50

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 $200 million, of which $160 million generated U.S. source income and $40 million generated foreign source income. The average fair market value of OVC's assets was $240 million, of which $180 million generated U.S. source income and $60 million generated foreign source income. OVC's total interest expense was $20 million.
a. What amount of the interest expense will be apportioned to foreign source income under the tax book value method
b. What amount of the interest expense will be apportioned to foreign source income under the fair market value method
c. If OVC wants to maximize its foreign tax credit limitation, which method produces the better outcome