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Recall that the price of the vehicle purchased on May 2 was reduced from $2,000 to $1,700 because it was the wrong colour. Under the periodic inventory system, the amount of the reduction is accumulated in a separate Purchase returns and Allowances, an income statement account. Excel would record the transaction as follows:
The Purchase returns and Allowances amount of $300 is deducted from Purchases when calculating cost of goods sold on the income statement. It is a contra account.
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