Eclipse is a business that contracts to develop, construct and operate solar power plants.

Eclipse entered into a contract to support the Sustainable Energy solar power plant. According to the contract terms, Eclipse is responsible for the day-to-day operations of Sustainable Energy as well as for general maintenance and repairs. Sustainable Energy expects Eclipse 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 Eclipse 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 spare parts at all times.

On a regular basis, Eclipse reviews a listing provided by Sustainable Energy of recommended spare parts for various components of the solar power plant and procures the necessary parts. Vendors deliver the parts to Eclipse along with a complete listing describing the quantity and cost of the parts provided. Eclipse 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 straight-line depreciation method for substantially all of the plant and it expenses all major plant maintenance.

Write a formal business memo to your boss, CEO of Eclipse, in good form, answering the following two questions. Be sure to provide codification references for your responses.

a) How should Eclipse classify the spare parts that it expects to use within one year; as inventory or as a prepaid/other current asset?

b) Should Eclipse amortize the spare parts over their estimated useful lives or expense them as consumed?