1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements. Note 2 (pg. 17) states that in 1984 Harnischfeger changed their depreciation method that was being used to expense their plants, machinery and equipment from the direct method to the straight-line method for financial reporting purposes. An adjustment of the residual values on certain machinery and equipment was made. Harnischfeger 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. 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?
Harnischfeger is adjusting its depreciation policy to the straight-line method from accelerated method they were using previously, which let the company increase net income as the adjustments are being applied retroactively. This change increased the net income to 11 million for 1984. Furthermore, this change will decrease profit in future years, because with the accelerated method, in the future years the depreciation expense would have been lower, 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 with the accelerated method the depreciation expense would have been lower as opposed to 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? Assuming that a straight-line method will be used, depreciation expenses will be more realistic. The change will increase profits by $3.2 million or $.27 per share, but reduces them in future profits to