Leonard, Josslen Leonard
17 January 2016
Assignment 2: Harnischfeger Case
1. Describe clearly the accounting changes Harnischfeger made in 1984 as stated in Note 2 of its financial statements .
In 1984 they changed the depreciation method they were using to expense their plants, machinery and equipment to the straight-line method for financial reporting purposes. This change included a adjustment of the residual values on certain machinery and equipment. They also included the products purchased from Kobe Steel, LTD and sold by them in their net sales. Furthermore 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?
This change increased the net income to 11 million for 1984. 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.
3. What is the effect of the depreciation lives change? How will this change affect future reported profits?
The depreciation live increase decreases the annual depreciation expense causing an increase in future profits reported. The effect of depreciation lives change is that Harnischfeger will have to continue using the machinery and plant for a longer period of time before it can be replaced. The using of machinery and plant for a longer period means loss of efficiency and productivity. It also means higher frequency of breakdowns and down time for repairs. The effect will be that the future reported profits will go down. There will be a negative effect on future reported profits.
4. The depreciation accounting changes assume that Harnischfeger’s plant and machinery will last longer and will lose their value more slowly. Given the...