This is the solution I was looking for.

I was trying to apply the CM, then send the new invoice to the client showing the new balance due (Inv total minus CM). I was not applying a payment at the same time as the CM, as the client had not paid yet. If you use "Receive Payment" in the invoice, it leaves the credit memo unapplied. Your solution of selecting "Payment" from the "New Transaction" drop down menu worked perfectly. The CM is showing Closed and the invoice is showing the correct balance due.

THANK YOU!!!