Harley-Davidson Accounting Assingment Help With Solution

Posted on March 20, 2017

Harley-Davidson Accounting Assingment Help With Solution

 
“Harley-Davidson (NYSE: HOG), is an American motorcycle manufacturer. Founded in
Milwaukee, Wisconsin, during the first decade of the 20th century, it was one of two major
American motorcycle manufacturers to survive the Great Depression. Harley-Davidson also
survived a period of poor quality control and competition from Japanese manufacturers. The
company sells heavyweight (over 750 cc) motorcycles designed for cruising on the highway.
Harley-Davidson motorcycles have a distinctive design and exhaust note. They are especially
noted for the tradition of heavy customization that gave rise to the chopper style of motorcycle.
Except for the modern VRSC model family, current Harley-Davidson motorcycles reflect the
styles of classic Harley designs. Harley-Davidson’s attempts to establish itself in the light
motorcycle market have met with limited success and have largely been abandoned since the
1978 sale of its Italian Aermacchi subsidiary. Harley-Davidson sustains a loyal brand
community which keeps active through clubs, events, and a museum. —
 
Unless noted otherwise, all dollar figures are in millions of U.S. dollars (US$000,000). Please
round to millions. Assume a tax rate of 25%. Total assets at year-end 2007 were 5,657.

 

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I. Ratios (23 points)
 
a. Compute Harley’s return on assets for 2009 and 2008 as we did in class. (5 points)
 
b. Compare Harley’s 2009 return on assets to 2008 in terms of the decomposition we talked
about in class (use Total Revenue). In particular, explain briefly in words and numbers
which terms of the decomposition changed and what conceptually each of the changes in
the terms tells you. (5 points)
 
c. Compute Harley’s return on equity for 2009 (no need to decompose it) and compare it to
return on assets. What does the difference relative to return on assets tell you? (3 points)
 
d. Suppose the CEO of Harley is compensated, in part, using Economic Value Added
(EVA) based on a cost of equity capital of 8%. Compute EVA based on equity for 2009.
Explain what the number is telling you. (4 points)
110
 
e. Lately, firms such as Microsoft have been encouraged to issue bonds at the low existing
interest rates and use the proceeds to pay dividends. Would doing that likely change
return on assets for Microsoft? If so, in what direction? Explain your rationale very
briefly including any assumptions you are making. (3 points)
Would it likely change return on equity for Microsoft? If so, in what direction. Explain
your rationale very briefly including any assumptions you are making.
 
II. Receivables, etc. (22 points)
 
Harley has two lines of business—a manufacturing/retail operation and a finance subsidiary.
Harley’s dealers are independent of Harley and sell motorcycles and related products (e.g.
Harley apparel). Harley’s finance subsidiary periodically purchases receivables from the dealers.
 
1. Harley’s “Finance Receivables” are all purchased from dealers using cash and Harley
either attempts to collect on them or sells them. You may assume that all financing
receivables are treated as “Investing” on the Statement of Cash Flows and may combine
current and noncurrent finance receivables. What journal entries did Harley record that
explain the change in financing receivables in 2009? (This is a hard question. Break it
into pieces and don’t freak out; I give partial credit). (Hint: You need to use information
from all three financial statements and from the footnotes). (14 points)
 
2. Estimate how long on average gross finance receivables are held by Harley before they
are disposed of (either by selling, collecting or writing off). (3 points)
 
3. What journal entries did Harley record in 2009 related to restructurings? You may
assume that Harley gave property, plant and equipment (e.g. company computers and
cars) to some of the retiring employees in lieu of cash for severance. Please show two
journal entries—both setting up the original expense as well as the partial extinguishment
of the liability. Your entries should explain the change in the restructuring liability on the
balance sheet. (5 points)
 
III. Manufacturing (22 points)
 
Assume that Harley manufactures motorcycles, but buys premade “Parts and general merchandise,”
which it resells. You may assume that all obsolescence relates to “Motorcycle finished goods,” and
that obsolete inventory is disposed of with no cash inflow or outflow. Assume that inputs into
manufacturing a Harley are 40% direct labor (all paid in cash), 30% direct materials, 15% depreciation
and 15% indirect labor (paid in cash). Raw materials purchases are on account using “Accounts
payable,” but purchases of “Parts and general merchandise” are with cash.
Estimate how long it takes from the point at which Harley pays it suppliers for raw materials until it
sells or disposes of finished motorcycles. (15 points)
 
Estimate how long it takes from the point at which Harley pays its suppliers for parts and general
merchandise until when it sells the parts and general merchandise. (3 points)
Suppose that in 2010 Harley paid employees $300, of which $100 was for employees working
producing motorcycles, $100 was for workers building a new administrative office facility, and $100
was for creative types who developed the ads that ran during the month. For each category of cost,
would the $100 likely be recognized as an expense against pretax income in 2010? If not, explain in
words when would it likely be recognized as an expense. (4 points)
 
Workers producing motorcycles: .
Workers building the office facility:
Workers developing advertisements:
 
IV. Intercompany Investment (23 points)
 
From time to time Harley makes investments in debt and equity securities. For each of the
following hypothetical transactions during 2010, provide the effect on Pretax Income for 2010,
and Total Assets and Total Equity as of year-end 2010. In other words, I want to know how net
income, total assets and total equity would differ conditional on the transaction occurring relative
to what they would have been without the transaction (both direction and amount). For example,
for pretax income you might say, “+60,” which would mean that pretax income would be 60
higher with the transaction than without. For purposes of this question, you may assume zero
taxes and that the cash tied up in the transaction would otherwise have earned zero. Please
provide at least a hint of thought process for partial credit. Each part is independent of the others.
a. On January 1, 2010, Harley purchases $100 million of 3-year US Treasuries (i.e.,
maturing on January 1, 2013) which they plan to hold to maturity. The securities pay 1%
interest in 2010 and end the year with a fair market value of $105 million. (4 points)
 
Effect on 2010: Pretax Income:
Total Assets:
Total Shareholder’s Equity:
 
For parts b. – d., suppose Harley is considering a purchase of Polaris shares. Assume that Polaris
has 30 million shares outstanding and trades at $60 per share on January 1, 2010. Polaris shares
are trading at $62 per share as of December 31, 2010 and pay a dividend of $1 per share in 2010.
Net income of Polaris for 2010 is $4 per share ($120 million in total)
 
b. On January 1, 2010, Harley purchases 1 million shares of Polaris for $60 million. The
shares are classified as securities available for sale. (6 points)
 
Effect on 2010: Pretax Income:
Total Assets:
Total Shareholder’s Equity:
115
 
c. On January 1, 2010, Harley purchases 1 million shares of Polaris for $60 million. The
shares are classified as trading securities. (4 points)
Effect on 2010: Pretax Income:
Total Assets:
Total Shareholder’s Equity:
 
d. On January 1, 2010, Harley purchases 10 million shares of Polaris for $600 million. (5
points)
Effect on 2010: Pretax Income:
Total Assets:
Total Shareholder’s Equity:
 
e. On January 1, 2010, Harley purchases all 30 million shares of Polaris for $1.8 billion.
You may assume that, as before, Polaris still earns $120 million, but no longer pays a
dividend or has a share price (since it is fully owned by Harley). (4 points)
Effect on 2010: Pretax Income:
Total Assets:
Total Shareholder’s Equity:
 

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