Deferred Tax Assets CPA Exam

What is a deferred tax asset and how do you account for a valuation allowance on the CPA Exam (FAR)? In this lecture, Professor Farhat walks through a CPA exam-style deferred tax asset problem, showing how temporary differences, changing tax rates, and valuation allowances affect income tax expense. You'll learn how a deferred tax asset relates to income tax expense, how to compute the effect of a valuation allowance change, and how to book the journal entries. Ideal for accounting students and CPA candidates studying deferred taxes in intermediate accounting.
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Video Timeline & Key Concepts:
0:00 — Introduction
0:17 — The nature of a deferred tax asset (GAAP vs. tax)
2:24 — Problem walkthrough begins
4:13 — How a DTA change affects income tax expense
10:23 — Conclusion and exam takeaways
Frequently Asked Questions:
What is a deferred tax asset?
A deferred tax asset arises from temporary differences that will reduce taxable income in future periods. It reflects future tax savings expected when the temporary difference reverses, and it requires understanding both financial accounting under GAAP and tax rules.
How does a change in a deferred tax asset affect income tax expense?
When a deferred tax asset increases, income tax expense decreases because the entry debits the DTA and credits income tax expense. When a deferred tax asset decreases, income tax expense increases because the entry credits the DTA and debits income tax expense.
What is a valuation allowance?
A valuation allowance reduces a deferred tax asset to the amount that is more likely than not to be realized. Increasing the valuation allowance lowers the net deferred tax asset and increases income tax expense.
How does a change in the tax rate affect a deferred tax asset?
A deferred tax asset is measured using the enacted tax rate expected to apply when the temporary difference reverses. When the tax rate changes, the deferred tax asset is remeasured, and the adjustment flows through income tax expense in the period of the change.
Why is the deferred tax asset topic considered difficult for CPA candidates?
Deferred taxes require combining financial accounting concepts with tax accounting mechanics, and many review courses assume prior knowledge. Working through a full problem step by step helps bridge that gap.
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