We received some product into stock and then determined it was improperly sewn. We sold 20% or so at a steep discount while waiting for a Vendor response. They have now issued a full credit.

Due to the restraints of the inventory system in QB, book the credit to Other Income.
Continue to sell the items at a discount.
COGS will reflect what you actually paid, but on the P&L Other Income will offset that expense.

@kpexped 

IMO, it makes the most sense to book the credit to COGS.  Other income is used for income unrelated to your primary business operations.  Booking the credit to COGS will offset the COGS that is being overstated each time you sell the defective product.