First, if cash was used to acquire the target, we should remove that cash from the combined balance sheet.
Then we should remove any existing shareholder’s equity out of the target’s balance sheet. If the acquiror issued new stock to acquire the target, then we should add the equity raised to the shareholder’s equity in the combined balance sheet. If the acquiror borrowed debt to acquire the target, we should add the new debt to the combined balance sheet.
If there are any financing fees, then these would be capitalized as an asset on the balance sheet and amortized over the life of the debt.
Any existing goodwill, deferred tax assets, and deferred tax liabilities on the target’s balance sheet should be eliminated.
If there is a PP&E or intangible assets write-up, then we will increase the PP&E or intangible assets and create a deferred tax liability equal to the write-up multiplied by the tax rate.
Finally, we will need to adjust goodwill to make the balance sheet balance.