In this step, we make adjustments to the combined company’s balance sheet based on financing assumptions modeled in the “S&U” tab. You can see that we zero-out TargetCo’s stockholders’ equity because BuyerCo is purchasing that equity.
Note that since we are using the new acquisition accounting rules (e.g. FAS 141r), we expense the advisory fees as incurred, rather than including them in the purchase price. Since we assume that these fees are incurred at the close of the transaction, we expense them immediately and deducted them from retained earning of the combined company.
We then sum each line item horizontally to arrive at the pro forma balance sheet for the combined business. Be sure to verify that total assets equal total liabilities plus stockholders’ equity.