Harnischfeger Corporation Case

Case study 3 Harnischfeger Corporation

1. Identify all the accounting policy changes and accounting estimates that Harnischfeger made during 1984. Estimate, as accurately as possible, the effect of these on the company's 1984 reported profits.

i. Foreign consolidated subsidiaries are effectively included in the financial statement in fiscal year 1984. ----This change increased the net sales by $5.4 million.(tax)

ii. Changed the depreciation method that the straight-line method for financial reporting, and principally accelerated methods for tax reporting purposes (used to use accelerated method for both purpose). ----This change increased net income for 1984 by $11 million or $0.93 per common and common equivalent share.(tax free)

iii. Change estimated depreciation lives on certain U.S. plants, machinery and equipment and residual values on certain machinery and equipment. ----increase net by $3.2 million and $0.27 per share.(tax free)

iv. Corporation includes in its net sales (full price) products purchased from Kobe Steel, Ltd. And sold by the Corporation, which only the gross margin on Kobe-originated equipment was included. ----This kind of sales was $28million.(tax)

v. Inventory reductions by using LIFO method. ----increase net income by $2.4 million or $0.2 per share.(B/S)

vi. Changes in the investment return assumption rates for all U,S, plans, and the restructuring of the U.S. salaried Employees' plan. ----reduce pension expense by approximately $4 million. (tax)

According to income statement EBIT=5,738,000 Income tax=2,425,000

So the income tax rate=2425/5738=42.26%

 Change in foreign consolidation=5,400,000*(1-42.26%)=3,117,960

 Change in full price sales(after tax)=28,000,000*(1-42.26%)=16,167,200

 Save cost in pension plan=4,000,000*(1-42.26%)=2,309,600

So total increase the profit by=11,000,000+3,200,000+2,400,000+3,117,960+16,167,200+2,309,600=$38,194,760

In the Income statement the net income: $15,176,000

If not change: $15,176,000-$38,194,760=$-23,018,760

So, the changing policy increase profit by $38,194,760, and if not change, it should be a loss of $23,018,760.

2. What do you think are the motives of Harnischfeger's management in making the changes in its financial reporting policies? Do you think investors will see through these changes?

 These changes are directly related to the profit of the financial year. After the changing, the financial figure from loss to profit, which is the investors prefer to look.

 Attract new investors. The company