Now that we have completed the purchase price allocation and specified our financing arrangements, we can enter all the adjustments needed to go from the LTM balance sheet to the pro forma balance sheet at closing. We begin by adding lines to the balance sheet we set up previously that reflect changes in the capital structure (i.e. new debt and/or preferred stock), then enter the adjustments by linking to cells in our selected financing scenario and purchase price allocation.
Recall that our financing expense were capitalized and will be amortizaed over time. Transaction expenses, on the other hand, are expensed immediately under FAS 141r. Therefore, capitalized financing costs appear as an asset on the balance sheet, while transaction expenses reduced retained earnings. Note that we also wipe out existing shareholders' equity, since we are purchasing it and replacing it with new equity.
To be sure that you entered the balance sheet adjustments properly, check that the pro forma balance sheet balances.