Gross Profit Method
On February 12, a hurricane destroys the entire inventory of Suncoast Corporation. An estimate of the amount of inventory lost is needed for insurance purposes. The following information is available:
Suncoast estimates its gross profit ratio as 25% of net sales. The insurance company has agreed to pay Suncoast $10,000 as a settlement for the inventory destroyed.
Determine the effect on the accounting equation of the adjustment to recognize the inventory lost and the insurance reimbursement.