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

inventory or as a prepaid/other current asset?

2. Should Big Desert depreciate the spare parts over their estimated useful lives or

expense them as consumed?