Case16-10

Spare the Rod

Stellar Bright Solar (SBS or the "Company") isa business thatcontracts to develop,construct, and operate solar power plants.SBS entered into a contract to supportthe Big Desertsolar power plant. According to thecontract terms, SBS is responsible for the day-to-day operations ofBig Desertas well asforgeneral maintenanceand repairs. Big Desert expects SBS to provide routinemaintenance for continued operation of the plantand respond to equipment breakdownsand failures by providing immediate repairs.In addition, the terms of the contract requireSBS to procure necessary materials to operate, maintain, and repair the plant. To complywith this requirement, the Company must maintain a certain level of materials andsupplies (the "spare parts") at all times.On a regular basis, SBS reviewsa listing provided by Big Desert of recommended sparepartsfor various componentsof the solar power plant and procures the necessary parts.Vendors deliver theparts to SBS along with a complete listing that describes the quantityand cost of the parts provided. SBS maintains this listing and uses it to (1) track expectedusage ofthe spare parts and (2) determine their expecteduseful lives.The spare parts consist of customizedand generic parts that vary in cost, procurementtime, expected usage (i.e., emergency replacement, standard replacement), and expecteduseful life. Big Desertuses the composite depreciation method for substantially all of theplant, andit expenses all major plant maintenance.

Required:1.How should SBSclassify the spare parts that it expectsto use within one year asinventory or as a prepaid/other currentasset?

2.Should Big Desert depreciate the spare parts over their estimated useful lives orexpense themas consumed?

perform research using the FASB ASC and make a accounting memorandum to provide background information, answer the questions in detail providing references to applicable ASC sections and examples. You may also use other reference material, as long as you provide the appropriate reference in APA at the end of the document.