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Smart Retail has been operating for $5$ years. The company runs an online platform that uses a

proprietary algorithm to match discounted company products that it acquires from retailers

$($such as Guess$/$GAP$/$Banana Republic$)$ with customers. The company has been pretty successful

in the past.

During the first six months of $2022,$ the current year of operations, business slowed down as

competition from other platforms intensified. More specifically, the company generated

revenues of $$700,000$ during the first half of $2022($as compared to revenue of $$850,000$ during

the same six$$month period last year$).$ All sales during the first half of $2022$ were made in cash

as the company never extended credit to its customers.

During the year, inventory worth $$500,000$ was acquired. Suppliers did not extend credit to

Smart Retail $($as they had done in the past$).$

The company decided to raise additional capital. It secured a credit line from the local bank,

and took out a $3$year loan of $$500,000$ at the beginning of July $2022.$ The interest rate on the

loan was set at an annual rate of $12\%.$ The amount borrowed $($i$.$e$.$ the principal$)$ was due in $3$

years. The company did not make any interest payments in cash during $2022.$

The company used half of the loan proceeds to pay down part of the outstanding balance it had

with its suppliers. Also, the company used the other half of the loan proceeds to replace its IT

infrastructure. The new servers were expected to be used for $5$ years before a replacement was

required. $($hint: the existing servers were fully depreciated$).$ These activities took place at the

beginning of July $2022.$ During the same time, the company acquired a $1$year insurance

coverage for its servers costing $$10,000.$ It was paid in cash.

In order to make its business more attractive to customers, the company decided to extend

generous credit terms to its customers during the second half of $2022.$ More specifically, the

company adopted a new policy extending credit to customers for nine months. The strategy

proved beneficial and revenues over the second half of $2022$ were $$800,000.$

Moreover, during $2022,$ the company paid in cash $$40,000$ of administrative costs and $$50,000$

of marketing costs.

Towards the end of $2022,$ the company received an offer to sell the algorithm behind its

platform for $$1$ million. Bob, one of the $2$ founders of the company suggested that the company

use that information to record an intangible asset on its books by that amount. He claimed that

since the company had spent more than half a million in R&D to develop its algorithm, it would

only be fair that a corresponding asset was recorded on its balance sheet $($Bob had not taken an

accounting course during his life$).$

An inventory count at the end of $2022,$ showed $$400,000$ worth of inventory in the warehouse.

Taxes for the year were $$40,000$ and were paid in cash.

Attached is the company$$s balance sheet as of December $31,2021.$

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