Harnischfeger Case
1. Describe clearly all of the accounting changes Harnischfeger made in 1984.
-In 1984, there was a switch from accelerated to straight line depreciation retroactively. Because of this, the depreciation expense decreased.
-The estimated depreciation lives on certain U.S. plants, machinery and equipment changed. The economic life of these assets was increased, so the depreciation expense was lowered.
-There was an improvement in the minimum pension benefit. This change produced a lower pension expense.
-The was a liquidation of LIFO inventory quantities carried at lower cost compared with the current cost of their acquisitions. Because of this, COGS decreased.
-The accounts receivable were net of allowances for doubtful accounts of $5.9 million and $6.4 million at October 31, 1984 and 1983, respectively. This decrease results in higher accounts receivable.
-The was a change of the fiscal year from July 31 to September 30. This increased the sales by $5.4 million.
-The R&D expense was decreased by $7 million
-The structure of the long-term debt was changed. Subordinated debentures replaced term obligation and the debt payable in German marks retired.
-The company entered into a long-term agreement with Kobe Steel, Ltd, to supply Harnischfeger requirements for construction cranes for sale in the United States.
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?
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. 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.
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-In 1984, there was a switch from accelerated to straight line depreciation retroactively. Because of this, the depreciation expense decreased.
-The estimated depreciation lives on certain U.S. plants, machinery and equipment changed. The economic life of these assets was increased, so the depreciation expense was lowered.
-There was an improvement in the minimum pension benefit. This change produced a lower pension expense.
-The was a liquidation of LIFO inventory quantities carried at lower cost compared with the current cost of their acquisitions. Because of this, COGS decreased.
-The accounts receivable were net of allowances for doubtful accounts of $5.9 million and $6.4 million at October 31, 1984 and 1983, respectively. This decrease results in higher accounts receivable.
-The was a change of the fiscal year from July 31 to September 30. This increased the sales by $5.4 million.
-The R&D expense was decreased by $7 million
-The structure of the long-term debt was changed. Subordinated debentures replaced term obligation and the debt payable in German marks retired.
-The company entered into a long-term agreement with Kobe Steel, Ltd, to supply Harnischfeger requirements for construction cranes for sale in the United States.
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?
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. 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.
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