Accounting treatment for fd preclosure penalty

Could any one please explain, Fixed Deposit Preclosure Penalty accounting treatment for a Customer?

FD PreClosure Penalty is charged by most of the Banks @ 1 %. Interest Rate also will be applicable for the relevent tenure (that itself at a lesser rate than the rate at which FD was opened). This penelty 1% will be reduced on the reduced rate. The difference between Original Rate and the revised / reduced rate will be adjusted from the Principal and balance will be paid to the customer.

Example: Principal - Rs.1,00,000, Original Rate - 7%, Tenure - 3 Years; Cumulative on Maturity Amount - Rs.7,21,000/-

Interest Slab - 1 Year - 5%; 2 Years - 6% & >3 Years - 7%

Customer is preclosing the FD after 2 Years. Now the applicable rate is 6% Less 1% (5%) with retrospective effect.

1. Do I need to reverse the accrued income, due to decrease in Interest rate?

2. If so, Can I adjust this penalty from my assessable Interest Income?

3. What will be the scheme of entries from FD Opening till Preclosre?

I have prepared the following scheme of entries. Is that ok? Please suggest, if any changes to be made in this.

S. No.	Ledger	Group	Dr. / Cr.	Debit	Credit
1	At the time of Fixed Deposit Opening
	Fixed Deposit A/c	Fixed Deposit	Dr.	100,000
	Bank A/c	Cash	Cr.		100,000
	(Being Fixed Deposit Opened @ 7% for 3 Years, Cumulative maturity Value - Rs.1,21,000)

2	At the end of Year 1
	Accrued Interest on FD	Current Asset	Dr.	7,000
	Interest on FD	Indirect Income	Cr.		7,000
	(Being Interest Income for Year 1 accounted @ 7%)

3	At the end of Year 2
	Accrued Interest on FD	Current Asset	Dr.	7,000
	Interest on FD	Indirect Income	Cr.		7,000
	(Being Interest Income for Year 2 accounted @ 7%)

4	Closure Initiated on 1st Apr - 3rd Yr. beginng
	Interest on FD	Indirect Income	Dr.	2,000
	Penalty on Pre-Closure	Indirect Expenses	Dr.	2,000
	Accrued Interest on FD	Current Asset	Cr.		4,000
	(Being Preclosure Penalty & Interest Income difference reversal - @ 5% for 2 Years) Interest on FD Calculation - =(7000+7000)-(1000006%2) Penalty on Pre-Closure Calculation - =(1000001%2)

5	Accrued Interest transferred to FD on Maturity
	Fixed Deposit A/c	Fixed Deposit	Dr.	10,000
	Accrued Interest on FD	Current Asset	Cr.		10,000
	(Being Accrued Interest after Penalty & adjustment transferred to Fixed Deposit A/c) Calculation: =1000005%2 (equal to Balance in Accrued Interest A/c, after reversal adjustment)

6	On Fixed Deposit Closure
	Bank A/c	Fixed Deposit	Dr.	110,000
	Fixed Deposit A/c	Fixed Deposit	Cr.		110,000
	(Being Fixed Deposit Closed and credited to Bank A/c)

	Summary from the above Scheme of Entries
	1. Fixed Deposit Closed and Bank A/c increased to 1,10,000 from 1,00,000
	2. Accrued Interest on FD is nullified
	3. Penalty on Pre-Closure Cost Rs.2000 accounted
	4. Interest Income accounted for Rs.7000 in Year 1 & Year 2 each
	5. Difference of Interest rate reduction effected in Year 3, resulting in Interest Income debited to the extent of Rs.2000