Consider the following information provided from the annual report and 10-K statement of Baldwin Piano and Organ Company.

Interest income on installment receivables represents interest on receivables not sold to the independent financial institution. The following summary table was prepared on the basis of the business segment data reported by Baldwin:

The cash flow statement indicates that the company has repaid long-term debt of about $8.6 million, $5.6 million, and $8.3 million during Year 1, Year 2, and Year 3, respectively. The balance sheet indicates that the book value of the company€™s finished goods inventory decreased by about 8% from Year 2 to Year 3.
In March Year 3, the contents of one of the company€™s finished goods warehouses were damaged by exposure to smoke from a fire adjacent to the warehouse. The company has received insurance proceeds equal to the wholesale value of the destroyed inventory.
Accordingly, a gain of approximately $1,412,000 on the insurance settlement is included in the Year 3 consolidated statements of earnings in the component labeled Other operating income, net.
On January 27, Year 3, the company entered into an agreement in principle whereby Peridot Associates, Inc. (Peridot), would acquire all outstanding shares of the company€™s common stock at a per share price of $18.25, subject to certain contingencies. The agreement expired on May 16, Year 3. Under the agreement, the company was obligated to reimburse Peridot $800,000 for certain expenses incurred by Peridot. Additionally, the company incurred other expenses of approximately $305,000 related to the proposed acquisition. These combined expenses are included in the Year 3 consolidated statements of earnings as the component labeled Other operating income, net.

Required:
Identify and explain the sources of the change in Baldwin€™s profitability from Year 2 to Year 3 with a view to evaluating its current earnings quality and future prospects. To what extent can this change be attributed to changes in the management€™sestimates?

Income Statements for the Years Ended December 31, Year 3 Year 2 Year l Net sales Cost of goods sold Gross profit Income on the sale of installment $110,076,904 $103,230,431 (74,038,724) 29,191,707 $120,657 455 (89,970,702) 79,637,060) 30,439,844 30,686,753 5,746,125 443,431 530,761 40,407,070 5,256,583 308,220 3.803,228 39,807,875 4,023,525 350,058 3,768,760 37,334,050 receivables Interest income on installment receivables r operating income, net Operating expenses Selling, general, and administrative (26,187.629) (25,118,465) (23,970,568) expense Provision for doubtful accounts Operating profit Interest expense Income before income taxes Income taxes (1,702,234) (2,053,189) (2,131,644) 11,231,838 3,932,830 7,299,008 (2,884,000 $ 4,415,008 12,517,207 (2,232,258) 10,284,949 12,636,221 610,521) 10,025,700 (4,120,000)(4,090,000) $ 5,935,700 Net income S 6,164,949 Segment Revenue as a Percentage of Total Revenue Segment Profit as a Percentage of Segment Revenue Business Year 3 Year 2 Year 3 Year 2 Musical products Electronic Financing services 72.70% 22.20 5.20 8 1.50% 13.30 5.10 5.00% 14.80 52.80 7.60% 13.90 49.20