Stella Clara Solar (SCS or the "Company") is a business that contracts to develop, construct, and operate solar power plants. SCS entered into a contract to support the Magnus Desertus solar power plant. According to the contract terms, SCS is responsible for the day-to-day operations of Magnus Desertus as well as for general maintenance and repairs. Magnus Desertus expects SCS 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 SCS 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, SCS reviews a listing provided by Magnus Desertus of recommended spare parts for various components of the solar power plant and procures the necessary parts. Vendors deliver the parts to SCS along with a complete listing that describes the quantity and cost of the parts provided. SCS 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. Magnus Desertus uses the composite depreciation method for substantially all of the plant, and it expenses all major plant maintenance.

Required:

1. How should SCS classify the spare parts that it expects to use within one year as inventory or as a prepaid/other current asset? Discuss each side of the issue

2. Should Magnus Desertus depreciate the spare parts over their estimated useful lives or expense them as consumed? Discuss each side of the issue.

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