Deferred Tax Asset/Liability. CPA Exam. Intermediate Accounting.

How do you calculate and record a deferred tax liability on the CPA Exam (FAR)? In this worked example, Professor Farhat walks through a deferred income tax problem, showing how a temporary difference between tax depreciation and GAAP depreciation creates a deferred tax liability. You'll learn how to compute the deferred tax liability balance, prepare the journal entry with income tax payable and income tax expense, and reconcile the timing difference between cash paid to the IRS and expense recognized under GAAP — key topics for the CPA Exam. Ideal for accounting students and CPA candidates studying deferred taxes in intermediate accounting.
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Video Timeline & Key Concepts:
0:00 — Introduction
3:00 — Temporary differences create a deferred tax liability
7:39 — Calculating the deferred tax liability balance
8:50 — Preparing the journal entry
10:49 — Reversing the liability and key takeaways
Frequently Asked Questions:
What is a deferred tax liability?
A deferred tax liability arises from a temporary difference that will increase taxable income in future periods. It represents taxes that will be paid later because a deduction was taken for tax purposes sooner than the related expense is recognized under GAAP.
How does depreciation create a deferred tax liability?
Taking an accelerated or full deduction for tax purposes while using straight-line depreciation for GAAP creates a temporary difference. The remaining GAAP book value represents a future taxable amount that gives rise to a deferred tax liability.
How is the deferred tax liability balance calculated?
You multiply the future taxable temporary difference by the enacted tax rate. In this example, the remaining book value times the twenty-five percent rate produces the required ending balance of the deferred tax liability.
What does the journal entry for income taxes include?
The entry credits income tax payable based on current taxable income, adjusts the deferred tax liability to its correct balance, and records income tax expense as the balancing amount. Income tax expense is effectively the plug figure on the financial statements.
Why does the cash paid to the IRS differ from the recorded tax expense?
The cash paid reflects the tax return, while the recorded expense reflects GAAP. When cash paid exceeds the recorded expense, the company is reversing a previously created deferred tax liability.
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