The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.

a. Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference and explain why.

1. Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when paid.

2. Depreciation for book and income tax purposes differs because of different bases of carrying the related property, which was acquired in a trade-in. The different bases are a result of different rules used for book and tax purposes to compute the basis of property acquired in a trade-in.