Sbs Accounting

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 describing the quantity and cost of the parts provided. SBS maintains this listing, uses it to track expected usage of the spare parts, and to 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. The Company 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 inventory or as a prepaid/other current asset?

2. Should SBS amortize the spare parts over their estimated useful lives or expense them as consumed?

SBS has stock of spare constituents which are used to make stronger, construct, operate, keep and restore the solar vigour Plant. The business of SBS is to develop, bring together and function sunlight vigor plant.

An inventory is "Any object of precise exclusive property which reveals any of the subsequent characteristics of being held on the market within the usual path of enterprise or in procedure of construction for such sale and be presently consumed within the creation of items or services to be available on the market"

Basing this to the current case therefore, the following observation can be drawn

1) The main product in SBS trade is development, operation and upkeep of sunlight vigour Plant.

2) SBS is utilizing its spare ingredients just for complying with the industry requisites i.e. working, preserving and repairs of energy plant.

3) For the reason that the Spare elements are consumed in construction of choices (operating & maintaining vigor Plant) inventory of Spare materials must be labelled as "stock"

Why classify the spare parts as inventory