1a. What journal entry would Lenovo have recorded on the transaction? Please split it out into the major asset and liability categories in the above table.

1b. Suppose all of the preceding facts were the same, except that they had opted to pay 4,918 in cash and 4,542 in stock (a total of 90% x 10,500 =9,450) for a 90% ownership interest. What journal entry would they have recorded for the acquisition?

2. What journal entries would Lenovo have recorded in Year 2 for the equity securities?

IV. Intercompany Investment {14 points) 1. Intheir 2006 annual report, Lenovo disclosed the following. Note that the disclosure is in Hong Kong dollars and you may use Hong Kong dollars in your answer: Business combinations On April 30, 2005, the Group completed the acquisition of IBM's global personal computer business ("IBM PC Business"). The estimated total consideration for acquiring the IBM PC Business is approximately HKS 10,500 million, including cash and the Company's shares. Set forth below is a preliminary allocation of the purchase price (HKS '000, 000): Purchase consideration: - Cash 5,958 - Fair Value of shares issued 4,542 Total purchase consideration 10,500 The major components of identifiable assets and liabilities arising from the acquisition are as follows: Fair Value IBM Carrying Value HKS 000,000 HKS '000,000 Property, plant and equipment 627 611 Brands 4,735 - Liability -5,199 -5,220 Net identifiable assets acquired 163 -4,609 (liabilities assumed) 1la. What journal entry would Lenovo have recorded on the transaction? Please split it out into the major asset and liability categories in the above table. (7 points) 1b. Suppose all of the preceding facts were the same, except that they had opted to pay 4,918 in cash and 4,542 in stock (a total of 90% x 10,500 =9,450) for a 90% ownership interest. What journal entry would they have recorded for the acquisition? 2. What journal entries would Lenovo have recorded in Year 2 for the equity securities? Hint: Check the SCF for missing pieces. (7 points) Lenovo Group Limited BALANCE SHEET at March 31, Year 2 ASSETS Year2 Yearl Non-current assets Property, Plant & Equip., 314 365 Construction in progress 47 51 Intangible assets 1853 1838 Available for sale securities 102 68 Other 205 172 Total Noncurrent Assets 2521 2494 Current assets Inventories 450 472 Trade Receivables, net 728 861 Other 746 1182 Cash and cash equivalents 1809 2191 Total Current Assets 3733 4706 TOTAL ASSETS 6254 7200 Share Capital 1136 1180 Reserves 121 433 Total Equity 1257 1613 Non-current liabilities 891 1098 Current Liabilities Trade payables 1991 2282 Provisions and accruals 1510 1945 Income tax payable 89 87 Bank Loans 20 61 Current portion of long-term debt 437 49 Other 59 65 Total Current Liabilities 4106 4489 Total Liabilities 4997 5587 TOTAL LIAB. AND SHAREHOLDERS' EQUITY 6254 7200 Lenovo Group Limited INCOME STATEMENT For the year ended March 31, Year 2 Year 2 Sales of Goods 14,847.00 Cost of sales (13,160.00) Gross Profit 1,687.00 Selling, distribution and other expenses (1,103.00) Administrative expenses (628.00) Research and Development expenses (258.00) Unrealized Gain from Securities 32 Realized Gain from Sale of Securities 6 Operating loss (264.00) Interest Income 62.00 Interest Expense (40.00) Loss before taxes (242.00) Taxation (38.00) Loss for the year {280.00) Lenovo Group Limited CASH FLOW STATEMENT For the year ended March 31, Year 2 Year2 Cash flows from operating activities Net Income (280) Depreciation and amortization 281 Gain/Loss on sale of equipment and other assets (1) Change in Inventories 26 Change in receivables 616 Change in Payables (692) Other (59) Net cash generated from operating activities (109) Purchase of property, plant and equipment (107) Proceeds from sales of property, plant and equipment 11 Construction of property, plant and equipmentin process (64) Purchases of intangible assets (17) Purchases of equity securities (6) Proceeds from sales of equity securities 10 Net cash used in investing activities (173) Exercise of share options 10 Repurchase of shares {54) Dividends paid (178) Increase in bank borrowings 122 Cash from Financing (100) Change in Cash (382) 2. Receivables Movements in the allowance for doubtful accounts were as follows: Year 2 At the beginning of the year 14 Provisions made 25 Receivables written off -8 Recoveries 1 Excess reserves reversed -2 At the end of the year 30 Any income statement effects associated with bad debts are included in Administrative Expense. 3. Provisions and accruals Included in provisions are warranty, restructuring and battery recall liabilities as follows: Warranty Restructuring Battery recall Year ended March 31, Year 2 At the beginning of the year 698 8 Amounts charged to expense 405 236 Amounts utilized 486 -18 -7 Asset impairments due to restructurings 128 Excess amounts reversed 84 At the end of the year 533 98 2 All warrantees and battery recalls are settled in finished goods product. Restructuring liabilities are settled in cash. All income staement amounts associated with warrantees and battery recalls are in cost of sales on the income statement. Income statement amounts associated with restructuring are in selling, distribution and other expenses. Asset impairments were for reductions int he value of property, plant and equipment due to restructurings