Question

You have been asked to explain the appropriate policy for depreciation for the following two cases for a major utility:
Case A The utility has a number of transformers in its transformer stations that trans-form 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.
Case B 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. On installation, the utility replaces the existing transformer, which then has a useful life of 50 years. Transformers are not subject to obsolescence.

Required:
What is the appropriate accounting policy in these two unrelated cases?



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  • CreatedFebruary 17, 2015
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