Gross Profit Method of Estimating Inventory Losses On July 1, an explosion destroyed a fireworks…

Gross Profit Method of Estimating Inventory Losses

On July 1, an explosion destroyed a fireworks supply company. A small amount of inventory valued at $4,500 was saved. An estimate of the amount of inventory lost is needed for insurance purposes. The following information is available:

The normal gross profit ratio is 70%. The insurance company will pay the supply company $50,000.

Required

1. Using the gross profit method, estimate the amount of inventory lost in the explosion.

2. Prepare the appropriate journal entry to recognize the inventory loss and the insurance reimbursement.