The only way to combine the objects from the two different entities in you have an attribute (or combination of attributes) that can link two records.
If you iterate over the first entity, you will create objects and put them in the target list
When you iterate over Entity2, you will use a find activity to see if the ID exists in the target list, if it does, you can use a change object for the record you found, if not, you can create a new record and add it to the target list.
Hope this helps
If there is no attribute to tell what belongs where, please let me know on what logic you would want to combine the two records and I can figure out if that would be possible.