Taxation Paper 7

(b) The requirement is to determine Miramar’s State XY apportionment factor if State XY used an apportionment formula in which the property factor was double-weighted. This means that the property factor would be counted twice and then the total would be divided by 4 to determine the average. The apportionment factor would then be (60% + 50% + 49% + 49%)/4 = 52%.

(d) The requirement is to determine the correct statement regarding the foreign operations of Glencoe Corporation. Glencoe’s foreign earnings are subject to US income tax. Since Glencoe may have already paid an income tax on those earnings to a foreign country, Glencoe may take either a deduction or a tax credit for the foreign income taxes paid which mitigates the double taxation of Glencoe’s foreign-source earnings.

(b) The requirement is to determine Crocker’s maximum foreign tax credit for the current year. Since US taxpayers are subject to US income tax on their worldwide income, they are allowed a credit for the income taxes paid to foreign countries. However, the amount of credit that can be currently used cannot exceed the amount of US tax that is attributable to the foreign income. This foreign tax credit limitation can be expressed as follows: Foreign TI × (US tax) = Foreign tax credit limitation Worldwide TI In this case, the credit for the $40,000 of foreign income taxes paid is limited to the amount of US tax attributable to the foreign income, $30,000. $100,000 × ($210,000) = $30,000 $700,000

(b) The requirement is to determine the correct statement concerning Crocker Corp.’s unused foreign tax credit. The $40,000 – $30,000 = $10,000 of unused foreign tax credit resulting from the application of the limitation can be carried back one year and forward ten years and used to the extent that the taxpayer is below the limitation in those years.

(b) The requirement is to determine the amount of foreign tax credit that Raubolt Corporation may claim for the current year. Since US taxpayers are subject to US income tax on their worldwide income, they are allowed a credit for the income taxes paid to foreign countries. However, the amount of credit that can be currently used cannot exceed the amount of US tax that is attributable to the foreign income. This foreign tax credit limitation can be expressed as follows: Foreign TI � (US tax) = Foreign tax credit limitation Worldwide TI One limitation must be computed for foreign passive category income (e.g., interest, dividends, royalties, rents, annuities), with a separate limitation computed for foreign general category income. In this case, the foreign income taxes paid on passive category income of $7,500 is fully usable as a credit because it is less than the applicable limitation amount of ($30,000/$300,000) x $96,000 = $9,600 (i.e., the amount of US tax attributable to the income). On the other hand, the credit for the $32,000 of foreign income taxes paid on general category income is limited to the amount of US tax attributable to the foreign general category income of ($90,000/$300,000) x $96,000 = $28,800. Thus, Raubolt’s foreign tax credit for the current year totals $28,800 + $7,500 = $36,300.

(d) The requirement is to determine the information that must be presented when a client has changed accounting principles. Answer (d) is correct because in addition to identifying the nature of the change, the auditor must refer to the financial statement note that discusses the change in detail. Answer (a) is incorrect because while the auditor must believe that the change is justified, it is not necessary to explain it in the report. Answer (b) is incorrect because the cumulative effect of the change need not be described in the audit report. Answer (c) is incorrect because the auditor need not make explicit concurrence with the change.

C

C

A

A