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Stellar Bright Solar

By:   •  November 11, 2018  •  Essay  •  924 Words (4 Pages)  •  33 Views

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Case 16-10 Spare the Rod

Stellar Bright Solar (SBS) is a business that contracts to develop, construct, and operate solar power plants. SBS entered into a contract with the Big Desert solar power plant with terms to be responsible for the day-to-day operations, as well as the general maintenance and repairs for Big Desert. SBS is also expected to provide routine maintenance for continued operation of the plant, respond to equipment breakdowns or failures, and provide immediate repairs. To comply with contract terms, SBS must maintain a specific level of materials and spare parts on hand at all times. The spare parts are listed with the quantity and cost recommended by Big Desert to review when vendors deliver the parts to SBS. SBS can either classify the spare parts that it expects to use within one year as inventory or as prepaid/other current assets. SBS also has to determine what to classify the spare parts not expected to be used within that one year.

The spare parts expected to be used within one year or less are considered current assets. In the FASB Accounting Standards Codification, ASC 330-10-20 states about inventory “the aggregate of those items of tangible personal property that have any of the following characteristics: (1) held for sale in the ordinary course of business, (2) in process for production of sale, or (3) to be currently consumed in the production of goods or services to be available for sale.” The first two categories for inventory do not apply to the spare parts, but the last category does since these parts are involved in the production and the services available to customers by Big Desert.

  In contrast, it is possible to classify the spare parts as prepaid/other current assets for being paid in advance of their consumption and being used within a normal operating cycle. In ASC 210-10-45-1, prepaid expenses can be the following: “Insurance, interest, rents, taxes, unused royalties, current paid advertising service not yet received, and operating supplies.” Next ASC 210-10-45-2 states “Prepaid expenses are not current assets in the sense that they will be converted into cash but in the sense that, if not paid in advance, they would require the use of current assets during the operating cycle.” Both of these statements relate to the spare parts because they are involved in SBS’s operating activities, and operating supplies when used to maintain Big Desert’s solar power plant.

Additionally, another section specific to the Airlines industry inventory has some relation to spare parts. ASC 908-330-20 defines airline spare parts as “parts, appurtenances, and accessories of aircraft, of aircraft engines, of propellers, or of appliances that are maintained for installation or use in an aircraft, aircraft engine, propeller, or appliance but that are not yet installed or attached.” Even though SBS uses the spare parts for continued maintenance for Big Desert solar power plant, the spare parts are presently detached with plans to be attached and installed within a limited period of time. Therefore, SBS’s spare parts have similarities as airline spare parts and could also be classified as inventory.

In conclusion, SBS should classify the spare parts as inventory. Inventory was defined as consumed in the production of goods or services to be available for sale, and the spare parts are contributing to providing Big Desert customers with energy through repairs and maintenance. ASC 210-10-45-2 has some ties to the spare parts, but not enough to be classified as prepaid/other current assets. Primarily, since details about possible prepayment for SBS’s maintenance of Big Desert power plant was not included in the information given besides only stating a contract was agreed upon to include this requirement. Besides classified under inventory, there is no specified account that spare parts are required to be classified under U.S. GAAP.

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