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?

Replies (1)

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)-(100000*6%*2)
Penalty on Pre-Closure Calculation - =(100000*1%*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: =100000*5%*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

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