1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements.
On page 17, note 2 states that in 1984 Harnischfeger altered their depreciation from a direct method to the straight-line method for financial reporting purposes. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales instead of stating only the gross margin per unit. An adjustment of the residual values on certain machinery and equipment was made and they also included the financial statements of some foreign subsidiaries. 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?
By Harnischfeger adjusting its depreciation policy to the straight-line method; it allowed the company increase net income as the adjustments are being applied retroactively. This change increased the net income to 11 million for 1984. This will decrease profit in future years, and with the straight line they will continue to depreciate in the same amount for the life of the asset. This change will decrease profit going forward, because the straight line method they will continue to depreciate in the same amount for the remaining life of the asset. 3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The change will increase profits by $3.2 million or $.27 per share, but reduces them in future profits to be reported. 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? Yes, it is justifiable since in the Consolidated Statement of Operations, revenues went down from $447,461 to $398,708 in two years. Meaning that if...
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