I agree, using the video from the AVCHD and putting it in a different container will give far better results than re-encoding.

Also, I saw reference earlier to transcode settings that would downmix the 5.1 audio into stereo with Prologic II matrixing, which made my head hurt. The surrounds in the 5.1 are already phase-shifted as it is, which makes for less-than-ideal sound quality when downmixed again, owing to the way it was made. I tried to minimize this as much as possible, but putting additional phase-shifting on top of what is already there will most likely sound even more weird. I strongly recommend using the actual stereo mixes instead, and leaving the 5.1 for listening on an actual 5.1 system. The results will be much better.