Problem 24-45 (LO 24-1) Waco Leather Inc., a U.S. corporation, reported total ta

Question

Problem 24-45 (LO 24-1)

Waco Leather Inc., a U.S. corporation, reported total taxable income of $5.85 million. Taxable income included $1.95 million of foreign source taxable income from the company’s branch operations in Mexico. All of the branch income is general category income. Waco paid Mexican income taxes of $585,000 on its branch income.

Compute Waco’s allowable foreign tax credit. Assume a U.S. corporate tax rate of 34 percent. (Do not round intermediate computations. Enter your answers in dollars and not in millions of dollars.)

Explanation / Answer

Calculation of Waco allowable foreign tax credit :

   Waco’s pre credit us tax = 5,850,000*34%(tax rate)

                                            =$1,989,000

    Company’s foreign tax credit limit =( 1,950,000/5,850,000)*1,989,000

                                                          = 0.33*1,989,000

                                                          =$663,000

         Waco’s allowable foreign tax credit =$585,000

        Waco’s has excess limitation of tax =663,000-585,000

                                                                  = $78,000

   foreign tax credit =$663,000

foreign tax allowed during the year = $585,000 and the remaining foreign tax credit carry forward for prior years =$78,000

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