Cookieco, a domestic corporation, produces the world’s best tasting chocolate chip cookies. In addition to its domestic sales, Cookieco markets its cookies abroad through an extensive network of branch sales offices.

Please complete the Homework Problems found below. These will help you to apply the concepts you have learned from the readings. They require you to think critically about hypothetical situations to determine how to handle the given problem for tax purposes.

1. Cookieco, a domestic corporation, produces the world’s best tasting chocolate chip cookies. In addition to its domestic sales, Cookieco markets its cookies abroad through an extensive network of branch sales offices. Cookieco’s operating results for the current year are summarized below, by source and type of income:

2. Bikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Bikeco operates in Europe through Bike1, a wholly-owned Italian corporation that manufactures a special line of mountain bicycles for the European market. In addition, Bike1 owns 100% of Bike2, a U.K. corporation that markets Bike 1’s products in the United Kingdom. At end of the current year, the undistributed earnings and foreign income taxes of Bike1 and Bike2 are as follows:

3. Racketco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Racketco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign-based company sales income, paid $3 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profits, paid no foreign income taxes, and distributed a $12 million dividend.

4. Playco, an accrual basis domestic corporation, manufactures musical instruments for sale both in the United States and abroad. Playco’s functional currency is the U.S. dollar. Two years ago, Playco established a branch sales office in Switzerland. The sales office is a qualified business unit with the Swiss franc (CHF) as its functional currency. In Year 1, the branch had CHF40 million of taxable income, and paid CHF15 million of Swiss income taxes. The Swiss franc had an average exchange rate in Year 1 of CHF1 equals $1.10.

5. Powerco, a domestic corporation, manufactures batteries for sale in the United States and abroad. Powerco markets its batteries in Europe through its wholly-owned foreign marketing subsidiary, Powy. Powy was organized in Year 1, and its functional currency is the pound (£). Powy’s tax attributes for its first 2 years of operations are as follows: