Harnischfeger Case Questions + Answers
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
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.
The changes as defined in Note 2 are as follows: 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
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.
The changes as defined in Note 2 are as follows: 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
Cited: Palepu, K.G. (1985). Harnischfeger Corporation. Harvard Business School, 1-23.