Question

Required: "cach of the three cases, assess the need to apply component depreciation to the machine. That is, is the machi one asset, or should it be segregated into components, with each component depreciated separately? XA10-7 Standby Assets and Spare Parts: You have been asked to explain the appropriate policy for depreciation for the following two cases for a maior utility: Case A The utility has a number of transformers in its transformer stations that transform power from a high voltage to a lower voltage that is the required voltage for customers. To ensure that major customers that require a reliable source of power at all times (e.g., hospitals) have it, the utility installs two transformers. The first transformer is on-line continuously and has a useful life of 50 years. The second transformer is installed as a backup in case the first transformer fails. This is referred to as standby equipment. This means the hospitals will not lose their power supply. The second transformer is rarely used but is considered essential to customers that cannot afford to lose their power. The utility has other customers for which it is not critical that they have a reliable source of power at all times. They can afford to have a short period of time without power while the transformer is replaced. Spare transformers are kept in the storage facility until they are needed for installation. These spare transformers are recorded as a long-lived asset, called spare parts. On installation, the utility replaces the existing transformer. The newly installed transformer then has a useful life of 50 years. Case B Transformers are not subject to obsolescence. Required: What is the appropriate accounting policy in these two unrelated cases? Solution * * 410.8 Danreciation Comnut

Urgent!! please help me with 10-7

Answer 1

Case A:

The standby transformer are to be treated as PPE and depreciated along with the first transformer for 50 years. Since the transformer qualifies to be a PPE as per the definition and the useful life seem to be similar after installation.

Case B:

This Spare transformer is also a qualifying PPE and is to be treated as a PPE only. However, the depreciation should start from the day it has been installed since the asset is not available to use until it is installed.

Alternatively, It may be treated Capital Work in Progress instead of PPE as per the industry standard practice, would not make any difference to the accounting.