a) Harnischfeger 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. b) The Corporation changed its estimated depreciation lives on certain U.S. plants, machinery and equipment and residual values on certain machinery and equipment. c) Harnischfeger now includes in its net sales products purchased from Kobe Steel, Ltd. and sold by the Corporation, in order to reflect more effectively the nature of the Corporation's transactions with Kobe. Previously, only the gross margin on Kobe-originated equipment was included. d) The financial statements of certain foreign subsidiaries are included on the basis of their fiscal years ended July 31.
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? Because of the depreciation policy change, net income increased in 1984 by $3.2 million or $0.27 per share. This change will positively affect future earnings as depreciation (values will spread out over longer years) equitable allocation of the cost of plants, machinery and equipment over their useful lives.
3. What is the effect of the depreciation lives change? How will this change affect future reported profits? Because of the depreciation policy change assumes that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly, therefore future reported profits will be higher. Without these changes the corporation financial report would have showed a net loss instead of profit increase of ± $20.0 million.
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? With depreciation accounting changes that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly it was justified. They had to make these accounting changes to show that the company was turning the corner and again becoming “profitable”. Even though this was a short term solution it provided opportunities to increase credit ratings and having credit available to keep the corporation afloat. One drawback of this change of extending the lives of plant and machinery would increase maintenance costs.
5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet. Starting in 1982 the corporation started reducing their inventories. As described in Note 7 the effect of these liquidations was to increase net income by 2.4 million or $.20 per common share in fiscal 1984, and to reduce the net loss by approximately $15.6 million or $1.54 per share in 1983, and by $6.7 million or $.66 per share in 1982. Every time a company can reduce inventories it will have a positive effect on net income. Liquidating inventories brought in added revenues which improved the financial reports and or balance sheet.
6. Note 8 states Harnischfeger’s allowance for doubtful accounts. Compute the ratio of the allowance to gross receivables (receivables before...