Question

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. Use proper references with Bibliography where necessary.

Answer 1

Answer :-

1 ) :-

• The following are the perception which will be incorporated into business reminder on foresaid contextual analysis.
• In foresaid contextual investigation, save parts expended comprises of tweaked and also nonexclusive parts that shift in cost, time, expected utilization.
• Real extra parts are utilized guarantee smooth activity of sunlight based power plant and running for in excess of one period.
• Since few extras parts are redone and those can be utilized just to the explicit necessities whose cost is more contrast with other extra parts, save parts additionally relies upon essentialness of comparable parts, if save parts utilized are in more numbers like 1000 numbers and the sky is the limit from there, their expense is material with deference of fiscal reports that is up to a substance to decide how they need to apply acknowledgment and estimation criteria, when there are progressively extra parts with little individual cost at that point it's sensible for them to account as Plant Property and Equipment.
• Consequently I feel the extra parts utilized in making sunlight based power plant in running great condition ought to be represented as Plant Property Equipment and ought to be promoted.
• Deterioration: Deciding when to begin devaluation is small testing one, either to begin deterioration when they really supplanted a flawed part???? or on the other hand once the extra parts are accessible in the stockroom??.

2 ) :-

• For this situation ponder save parts are utilized to guarantee smooth task of sun oriented power plant with no intrusions, devaluation should begin for those extra parts promptly, and for the extra parts which are utilized as new part at some future time and this part will be introduced and put to use at later date then deterioration should begin when the part is introduced.