Deferred Tax Asset and Liability. CPA Exam Simulation. Intermediate Accounting.

How do you calculate deferred tax assets and liabilities on a CPA Exam simulation? In this FAR and intermediate accounting walkthrough, Professor Farhat works a multi-year deferred income tax simulation — identifying the temporary difference, computing taxes payable, recording the deferred tax asset or liability, and treating income tax expense as the plug — then tracks how the liability reverses over several years. Built for CPA candidates and accounting students studying accounting for income taxes.
Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students.
Video Timeline & Key Concepts:
0:00 — Introduction: deferred taxes, tax expense, and taxes payable
2:26 — Temporary difference from accounts receivable
8:48 — Step 1: calculate taxable income and the tax bill
10:29 — Step 2: record the deferred tax asset or liability
11:23 — Step 3: income tax expense as the plug figure
12:31 — Reversal of the temporary difference in later years
16:15 — Continued fluctuation of the deferred tax liability
Frequently Asked Questions:
What is the difference between income tax expense and income taxes payable?
Income taxes payable is the amount actually owed to the taxing authority based on taxable income, while income tax expense is the total tax cost reported under GAAP. The difference between them is recorded as a deferred tax asset or liability.
What is a temporary difference?
A temporary difference is a difference between the carrying amount of an asset or liability for financial reporting and its tax basis that will reverse in future periods. These differences give rise to deferred tax assets and liabilities.
When do you record a deferred tax liability versus a deferred tax asset?
A deferred tax liability arises when an item produces higher financial income now and higher taxable income later, while a deferred tax asset arises when taxes are effectively prepaid or deductible amounts are recognized later. The direction depends on how the temporary difference will reverse.
Why is income tax expense treated as a plug?
Once taxes payable and the change in deferred tax accounts are determined, income tax expense is the amount that balances the journal entry. It equals the current taxes owed plus or minus the change in deferred tax accounts.
Why is accounting for income taxes tested so heavily on the CPA exam?
It combines GAAP, tax rules, journal entries, and multi-year tracking of reversing differences, making it a rich way to test application. Working full simulations, as shown here, builds the tracking skills FAR rewards.
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