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.
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?
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. This change should cause profits to increase at a higher rate in future years but was insignificant for 1984 reporting..
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The impact of the new method on income for the year 1984 before the cumulative effect was insignificant. As a result of the review of its depreciation policy, the Corporation, effective November 1,1983, has changed its estimated depreciation lives on certain U.S. plants, machinery and equipment and residual values on certain machinery and equipment, which increased net income for 1984 by $3.2 million or $.27 per share. No income tax effect was applied to this change. This change should report higher profits in the coming years.
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?
Not necessarily, they can not fully predict the outcome of these changes but history shows them that as long as their plant machinery are more up to date production will perform at a