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Harnischfeger Case

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Question 1 Harnischfeger’s corporate recovery plan was a four pronged approach that involved (1) changes in top management, (2) cost reductions to lower the break-even point, (3) reorientation of the company’s business and (4) debt restructuring and recapitalization. These changes at first glance appear to have allowed Harnischfeger to improve its financial performance from a net loss of $3.49 per share in 1983 to a net gain of $1.28 per share in 1984. In addition, Harnischfeger has appeared to have achieved a majority of its desired outcomes from each of its four changes as shown below. • Harnischfeger’s desired outcomes from hiring a new COO and Vice President of Finance and Administration were to re-build investor and creditor …show more content…

Assumptions: Reported net income in 1984 $15,176,000 2 Change to depreciation method (11,000,000) 2 Change to salvage life on assets (3,200,000) 2 Change to inventory valuation method (2,400,000) 3 Change to equipment sales recognition (16,167,200) 4 Change to fiscal year end for subsidiaries (3,117,960) 5 Change to pension plan and rates (2,309,600) Estimated net income (loss) in 1984 excluding accounting and other charges identified in part A $(23,018,760) 1 The effective tax rate used in 1984 = 0.4226 (2,425/5,738) – used formula from case 2 Effective tax rate not applied here – these are already net income numbers 3 Equipment sales subject to effective tax rate = 16,167,200 [28,000,000 * (1 – 0.4226)] 4 Fiscal year change subject to effective tax rate = 3,117,960 [5,400,000 * (1 – 0.4226)] 5 Pension plan change subject to effective tax rate = 2,309,600 [4,000,000 * (1 – 0.4226)] c. The difference between conservative and aggressive accounting choices centers around how revenues, expenses, assets and liabilities are recorded as shown below: Conservative: Aggressive: Record revenues later Record revenues sooner Record expenses sooner Record expenses later Record lower levels of assets now Record higher level of assets now Record higher level of liabilities now Record lower level of assets now Harnischfeger’s accounting

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