Norine,
How do the bank statement successfully post if the transaction was cancelled? Was it cancelled after the end date of the bank statement?
The reason i ask is that i'm not clear as to how the bank statement was successfully posted in the first place, unless the transaction was cancelled after the fact. If the beginning and ending balance are correct, then i would leave the statement alone and to resolve just the payment allocation.
One option would be to switch the allocation over to a direct G/L posting and put it against a clearing account (as i would expect a different item on a subsequent bank statement to represent the actual reversal of the cancelled item, which you can then allocate to the same clearing account to net the amounts out)
It may help if you post a screenshot of what you see on the payment allocation screen.