Problem:
Home Brew Supplies Inc. uses the perpetual inventory method. Home Brew requested a price reduction from a vendor because the merchandise that was purchased did not meet specifications. The vendor sent Home Brew a credit memorandum for $2,300 to resolve the issue.
Required:
How would Home Brew record this transaction?
- Debit Cost of Goods Sold for $2,300 and credit Accounts Payable for $2,300.
- Debit Merchandise Inventory for $2,300 and credit Accounts Payable for $2,300.
- Debit Accounts Payable for $2,300 and credit Merchandise Inventory for $2,300.
- Debit Purchase Returns and Allowances for $2,300 and credit Accounts Payable for $2,300.
- Debit Accounts Payable for $2,300 and credit Purchase Returns and Allowances for $2,300.
Note: Explain all steps comprehensively.