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Assume that the vehicle purchased by Excel turned out to be the wrong colour. The supplier was contacted on May 3 and agreed to reduce the price by $300 to $1,700. This is an example of a purchase returns and allowances adjustment. The amount of the allowance, or reduction, is recorded as a credit to the Merchandize Inventory account, as follows:
Note that the cost of the vehicle has been reduced to $1,700 ($2,000 – 300) as has the amount owing to the supplier.
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