The following response is based solely on the question and background information provided. As we do not have all the facts particular to your contract, program and situation, we highly recommend you consult your Contracting Officer and Legal Office for guidance.
Based on your scenario, the modification should have reflected the following:
CLIN 0002 is reduced by $4,000 from $5,000 to $1,000.
You would also reflect the line of accounting as being reduced as well.
You would not want to delete or reduce CLIN 0002 to $0 as CLIN 0002 still has $1,000. There would be no need to create a new CLIN 0003 as CLIN 0002 would still reflect the balance from the original amount of $5,000 less $4,000.