Deferred tax liability and asset. CPA exam Practice FAR Questions. Intermediate Accounting

How do differences in depreciation methods create deferred tax assets and liabilities? In this FAR and intermediate accounting practice session, Professor Farhat works CPA-style questions on deferred taxes — showing how using different depreciation methods for GAAP and tax creates temporary differences, how to tell whether the result is a deferred tax asset or liability, and how to eliminate answer choices quickly. Built for CPA candidates and accounting students.
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: how depreciation differences create deferred taxes
1:40 — Switching from double declining balance to straight-line in year 3
3:25 — Eliminating answer choices without full computation
6:18 — Identifying a deferred tax asset
8:45 — Working the example calculation
11:10 — Recognizing the item is often enough to answer
Frequently Asked Questions:
How do depreciation differences create deferred taxes?
When a company uses one depreciation method for financial reporting and another for tax, the book and tax basis of the asset differ temporarily. These temporary differences reverse over time and give rise to deferred tax assets or liabilities.
When does a temporary difference create a deferred tax asset?
A deferred tax asset generally arises when taxable income is currently higher than book income, effectively prepaying taxes that will reverse later. In this example, higher GAAP depreciation relative to tax depreciation leads to a deferred tax asset.
When does a deferred tax liability arise?
A deferred tax liability arises when book income is currently higher than taxable income, deferring taxes to future periods. This often occurs when tax depreciation exceeds book depreciation early in an asset’s life.
How can you answer deferred tax questions quickly on the exam?
Often you can determine whether the item is a deferred tax asset or liability, or whether a difference is reversing, without doing the full computation. Recognizing the direction of the difference is frequently enough to eliminate wrong choices.
Why do depreciation methods differ for book and tax?
Companies often use accelerated methods for tax to defer taxes and a straight-line or other method for financial reporting. Because the total depreciation is the same over the asset’s life, the differences are temporary and reverse over time.
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