Harnischfeger Case

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1.Describe clearly all of the accounting changes Harnischfeger made in 1984.

-In 1984, there was a switch from accelerated to straight line depreciation retroactively. Because of this, the depreciation expense decreased. -The estimated depreciation lives on certain U.S. plants, machinery and equipment changed. The economic life of these assets was increased, so the depreciation expense was lowered. -There was an improvement in the minimum pension benefit. This change produced a lower pension expense. -The was a liquidation of LIFO inventory quantities carried at lower cost compared with the current cost of their acquisitions. Because of this, COGS decreased. -The accounts receivable were net of allowances for doubtful accounts of $5.9 million and $6.4 million at October 31, 1984 and 1983, respectively. This decrease results in higher accounts receivable. -The was a change of the fiscal year from July 31 to September 30. This increased the sales by $5.4 million. -The R&D expense was decreased by $7 million

-The structure of the long-term debt was changed. Subordinated debentures replaced term obligation and the debt payable in German marks retired. -The company entered into a long-term agreement with Kobe Steel, Ltd, to supply Harnischfeger requirements for construction cranes for sale in the United States.

2.What is the effect of the depreciation accounting method change on the reported income in 1984? How will this change affect profits in future years?

In 1984, the Corporation has computed depreciation expense on plants, machinery and equipment using the straight-line method for financial reporting purposes. Prior to 1984, the Corporation used principally accelerated methods for its U.S. operating plants. The cumulative effect of this change, which was applied retroactively to all assets previously subjected to accelerated depreciation, increased net income for 1984 by $11.0 million or $.93 per common and common equivalent share. In the future years the profits will be lower compared to the profits calculated with the depreciation accelerated method. With the accelerated method, the depreciation expense would decrease every year, while the depreciation expense is the same every year with the straight-line method. So in future years the depreciation expenses will be higher compared to the accelerated method. Because of this, in future years profits will be lower.

3.What is the effect of the change in depreciation lives? How will this change affect future reported profits?

As a result of the review of its depreciation policy, the Corporation, effective November 1, 1983, has changes its estimated depreciation lives on certain U.S. plants, machinery and equipment and residual values on certain machinery and equipment, which increased profits for 1984 by $3.2 million or $.27 per share. The change in depreciation lives will reduce the future profits.

4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. Given the business conditions Harnischfeger was facing in its primary industries in 1984, are these economic assumptions justified?

The changes in accounting for depreciation were made to conform the Corporation’s depreciation policy to those used by manufacturers in the Corporation’s and similar industries and to provide a more equitable allocation of the cost of plants, machinery and equipment over their useful lives. I think these assumptions were justified, because they were experiencing a diminishment in sales. In the Consolidated Statement of Operations, revenues went down to $398,708 in 1984 from $447,461 in 1982. This means that they were giving less use to their machinery and that causes an increase on the useful life of the asset.

5. Note 8 indicates Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables (receivables before the allowance)...
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