Deferred Tax Assets Liability CPA Exam Simulation

How do you compute deferred tax assets and liabilities? This CPA Exam FAR simulation works a three-year depreciation example to show how temporary differences between GAAP and tax reporting create and reverse a deferred tax liability — built for accounting students and CPA, CMA, and EA candidates studying accounting for income taxes.
Professor Farhat computes book versus tax income each year, prepares the income tax expense journal entries, and shows how the temporary difference fully reverses over time.
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 to the deferred tax simulation
0:30 — Temporary differences from straight-line versus accelerated depreciation
3:04 — Year 1: accelerated tax depreciation creates a deferred tax liability
6:58 — Year 2: GAAP and tax depreciation align with no deferred impact
8:34 — Year 3: the temporary difference reverses and the liability is removed
10:43 — Total reconciliation: net income differences fully reverse over three years
Frequently Asked Questions:
What is a deferred tax liability?
A deferred tax liability arises when taxable income is temporarily lower than book income, often because accelerated depreciation is used for tax while straight-line is used for GAAP.
What causes a temporary difference?
A temporary difference occurs when an item is recognized in different periods for book and tax purposes, such as depreciation, and it eventually reverses.
What is the difference between a deferred tax asset and a deferred tax liability?
A deferred tax liability reflects taxes expected to be paid in the future, while a deferred tax asset reflects future deductible amounts that will reduce future taxes.
Why do total book and tax income match over time?
Because temporary differences only shift income between periods, the cumulative book and tax income are equal once all the differences reverse.
How is income tax expense recorded?
Income tax expense combines the current tax payable to the taxing authority with the change in deferred tax accounts for the period.
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