Case study question 1.3 – Current or Non-Current?
Harper and Associates purchased U.S. Treasury notes five years ago, which are now three months away from maturity. Harper and Associates has asked you whether it is appropriate to reclassify these notes into the current assets category of its balance sheet, as cash equivalents.
1. Citing guidance from the Codification, respond to Harper and Associates.
2. Explain how you located the relevant guidance, including the search method used, and which section you searched within the appropriate topic.
The relevant guidance can be found in ASC 230-10-20, which have been obtained by scrolling over the statement of cash flows from the presentation section on the left, then overall-glossary
TrueBlood Case 16-10 Spare the Rod
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 describing the quantity and cost of the parts provided. SBS maintains this listing, uses it to track expected usage of the spare parts, and to 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. The Company uses the composite depreciation method for substantially all of the plant, and it expenses all major plant maintenance.
Question: How should SBS classify the spare parts that it expects to use within one year: as inventory or as a prepaid/other current asset?
Follow and document all the steps from chapter 2 as you work towards a response (ultimately provided in step 6 below).
Steps from Chapter 2:
1. Understand the facts / background of the transaction.
a. Who are the parties to the transaction and why are they entering into it?
b. What are the cash flows associated with the transaction, from SBS’s perspective?
c. What questions, if any, might you like to ask about this transaction?
2. What are two researchable question(s) related to this problem, based on the information you have?
3. Stop and think: what accounting treatment will likely be appropriate, based on your accounting knowledge? Explain.
4. Search potentially relevant sources of guidance, documenting your process (i.e., show the path searched or search terms used from which each piece of guidance results) and copying and pasting guidance into a Word document. Include this Word file as an appendix rather than in the body of your response.
5. List and analyze alternatives, documenting how each does or doesn’t fit with the case facts.
6. Justify and document your conclusion to the required question.
[Note: Your response to Step 5 should be fairly long. Your response to Step 6 should be short, as it will simply reference arguments you already made in Step 5 and conclude which alternative has the most support.]