Case 16-10 Spare the Rod Stellar Bright Solar (SBS or the “Company”) is a busine
ID: 2569090 • Letter: C
Question
Case 16-10
Spare the Rod
Stellar Bright Solar (SBS or the “Company”) is a business that contracts to develop, construct, and operate solar power plants.
SBS entered into a contract to support the Big Desert solar power plant. According to the contract terms, SBS is responsible for the day-to-day operations of Big Desert as well as for general maintenance and repairs. Big Desert expects SBS to provide routine maintenance for continued operation of the plant and respond to equipment breakdowns and failures by providing immediate repairs. In addition, the terms of the contract require SBS to procure necessary materials to operate, maintain, and repair the plant. To comply with this requirement, the Company must maintain a certain level of materials and supplies (the “spare parts”) at all times.
On a regular basis, SBS reviews a listing provided by Big Desert of recommended spare
parts for various components of the solar power plant and procures the necessary parts.
Vendors deliver the parts to SBS along with a complete listing that describes the quantity
and cost of the parts provided. SBS maintains this listing and uses it to (1) track expected
usage of the spare parts and (2) determine their expected useful lives.
The spare parts consist of customized and generic parts that vary in cost, procurement
time, expected usage (i.e., emergency replacement, standard replacement), and expected
useful life. Big Desert uses the composite depreciation method for substantially all of the
plant, and it expenses all major plant maintenance.
Required:
1. How should SBS classify the spare parts that it expects to use within one year — as a prepaid/other current assets? ?
Explanation / Answer
SBS should consider the spare parts as current asset itself, since it is only available for less than an year. Also the full risk and rewards on the asset is with SBS. Since they takes the ownership for some time they have to record this as their asset, also it for a period which is less than 1 year we can classify this as current asset.
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