On 1 January 20X1, Baker Ltd (BL) purchases an oven at a cost of $7,800. BL expects the oven to remain useful for four years. At the end of four years, the supplier is willing to take back the oven for $400. BL pays 20% in cash for the oven and finances the remainder with a bank loan obtained on the same day. The bank charges 5% interest on the loan and interest is to be paid subsequently every 1 January. The first interest payment is on 1 January 20X2. The company uses the straight-line method to account for depreciation of the oven.

Required:

(a) Illustrate the accounting described above by preparing journal entries, journal narratives required, for 1 January 20X1 and 31 December 20X1.

(b) At the end of year 20X2, BL disposes the oven to another company for cash of $3,000. Illustrate how gains or losses on disposal of the oven would be different if BL had used the double-declining method to account for the ovens depreciation? Support your answer with appropriate computations.