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Accretion Reserve treatment - need help urgent - boy2000 - 07-05-2011


I am a CA trainee doing articles from a small firm, currently i am preparing accounts for a private investment co. incorporated outside Pakistan, last week i came across a problem while preparing F/S of that client, i have discussed the issue with my manager he explained me how to treat the issue but I am still not satisfied with the treatment. So I am requesting you people to kindly guide me in this particular case

Our client has invested in a project say $3 million for 2 years..they are charging 20% interest which they treat as [Accretion Reserve instead of interest income] and increase the value of Long term loans with the same amount which is shown in face of B/S

following entries are being made by us

Long term loan 3,000,000 (Dr)
Cash 3,000,000 (Cr)
(at the time of investmment)

and thereafter every month we pass the following entry for recording accretion..

Long term loan 50,000 (Dr)
Accretion reserve 50,000 (Cr)
(3,000,0000 X 20% /12)

after 2 year the carrying value of long term loan becomes 4,200,000

and both parties agree to settle the loan for 3,500,000

here comes the trouble..kindly guide me what entry should be made at this stage..

This is what my manager suggests

Bank 3,500,000 (Dr)
Accretion reserve 1,200,000 (Dr)
Long term loan 4,200,000 (Cr)
Gain on settlement 500,000 (Cr)

where as i think the correct treatment will be

Bank 3,500,000 (Dr)
Loss on settlement 700,000 (Dr)
Long term loan 4,200,000 (Cr)

Accretion reserve 1,200,000 (Dr)
R/E 1,200,000 (Cr)