Deferred Tax Assets and Liabilities. Comprehensive Problem!

How do you solve a comprehensive deferred tax assets and liabilities problem? In this CPA exam walkthrough, Professor Farhat guides CPA, CMA, and EA candidates and accounting students through a full deferred tax problem — bridging the gap between taxable income and financial income, computing deferred tax assets and liabilities, recording the journal entries, and presenting income tax expense on the income statement. Ideal for anyone studying intermediate accounting, accounting for income taxes, and FAR-topic deferred 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
0:38-2:12 — Future taxable amounts that create deferred tax liabilities
2:00-2:20 — Future deductible amounts that create deferred tax assets
3:25-9:55 — Computing the change in deferred tax balances from existing accounts
10:15-12:35 — Reconciling financial pre-tax income from taxable income
12:48-14:45 — Journal entries for income tax expense, deferred taxes, and taxes payable
14:46-15:20 — Reading the question to identify what is being asked
15:21-15:50 — Presenting income tax expense on the income statement
Frequently Asked Questions:
What creates a deferred tax liability?
A deferred tax liability arises from future taxable amounts, which occur when income is recognized for financial reporting before it is taxed. These temporary differences will increase taxable income in future periods.
What creates a deferred tax asset?
A deferred tax asset arises from future deductible amounts, which occur when an expense is recognized for financial reporting before it is deductible for tax or when income is taxed before it is recognized. These will reduce future taxable income.
How do you reconcile financial income and taxable income?
You start from taxable income and adjust for temporary and permanent differences to arrive at pre-tax financial income, or work in the opposite direction. Temporary differences drive the deferred tax accounts, while permanent differences do not.
How is income tax expense recorded?
Income tax expense is recorded together with income taxes payable and the change in deferred tax assets and liabilities. In many problems, income tax expense is the plug that balances the entry once the other amounts are known.
What is the best way to approach these problems on the exam?
Read the question first to identify exactly what is being asked, such as income taxes payable or the change in deferred taxes. Then perform only the reconciliation needed rather than solving for every variable at once.
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