In this workout, Cat Inc have acquired the equity of Dogs for 10,000, using 50% debt and 50% equity funding We're asked to create a proforma balance sheet for Cats and Dogs using the financials given So I can see Cats stand alone balance sheet here, I can see Dogs stand alone balance sheet here I then want to add on any adjustments to get to my proforma Let's come up with a proforma column first, let's sum to the left So remember investor plus investee plus any adjustments I'm going to copy that same formula down for accounts receivable and for inventories My total current assets I don't want to add to the left, I want to add upwards So any subtotals, subtotals we want to go up. Any individual line items go to the left So let's do all of the other individual line items (PP&E and goodwill) I always want to do short term debt, accounts payable, long term debt and shareholders' equity Now let's do the subtotals, total assets Will be the sum of the three above Short term liabilities, the sum of the two above Total liabilities, I have my long term debt and the short term liabilities And total liabilities and equity is the two above Great! Now I just do a quick check at this stage My total liabilities are 24,380 and my total assets is the same, good! Okay, so the next thing we need to do is start putting some deal adjustments in We've got some room for this underneath, we're going to do a total uses of funds and total uses of sources of funds To help us calculate equity financing and debt financing Our equity purchase price was given in the question and it was 10,000 So my total uses of funds is just the 10,000 My equity financing issued was 50% of the equity purchase price, so times that by 0.5 I know that my debt financing was going to be the plug, it was going to be the remainder So total sources of funds, yes equals my total uses of funds So let's put that new equity financing issued and debt financing issued into the deal adjustments column So long term debt, that's the 5,000 on new debt And the equity is the equity financing issued There is another equity issued that we need to deal with here, and that's the shareholders' equity of the target at 6,680 We need to zero that out, it doesn't exist anymore. We've just bought those shares and ripped them So I subtract out the 6,680 Next we have the goodwill calculation, we're going to start by taking the purchase price of 10,000 And I then need to workout the target's net assets The target's net assets I could take total assets minus total liabilities But that would just get me the same as shareholders' equity, so let's do that But there is a particular asset that we are going to have to step down That's the existing target's goodwill They had goodwill of 340, we're going to say no that doesn't actually have any value. Let's get rid of that! So my target's identifiable net assets are now 6,340 We have paid above that, we have paid 10,000 for something that has book value of 6,340. That creates goodwill of the difference I now put that 3,360 into the balance sheet My balance sheet is almost finished However you note it doesn't quite balance yet, my total assets and total liabilities and equity are different figures That's because of the goodwill, let's go back down to our goodwill calculation Because I took out the goodwill here, because I subtracted it from net assets The effect that had was to add it to the deal goodwill This goodwill here includes the 340. Watch, if I get rid of that 340, if I put a zero in there, I'll find that the deal goodwill goes down It did, it went down So by subtracting it from the net assets or the equity up here, I add it to the deal goodwill I'll even make a note underneath here that 3,660 includes existing target goodwill of 340 So if I go up to my balance sheet now And if I look at the calculation we've done We've taken existing Cats goodwill of 1,000 plus existing Dogs goodwill of 340 plus the 3,660 Oh dear, that means I've got the 340 being added here and here. I'm adding the 340 twice because the 340 is included in the 3,660 So the extra thing I need to do here is I now need to subtract that 340, I need to zap it out Fantastic! My balance sheet is now balanced, total liabilities and total assets are now the same