Merger Accounting
I'm building a model for a recent deal that was financed with debt and preferred stock. For the combined balance sheet pro forma, I increased the combined equity account by the BV of the acquior and the recent purchase price. I also increased the amount of debt and preferred stock by the amount used for the deal, and made an adjustment for goodwill. I deducted from cash the amount used for financing the deal, and then capitalized the financing and advisory fees.
1) Should I have only made an adjustment to the common stock account by the amount of the recent transaction while keeping retained earnings at the previous years level, or should I have just increased the entire equity account to the entire amount of the deal.
2) It seems like increasing the debt and preferred stock, while also increasing the amount of the equity will always outweigh the assets because goodwill only goes up by the amount of the new equity value. It almost seems like double counting, but I am prob overlooking some accounting concept. Thanks
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