The consolidation treatment of profits on inventory transfers that occurred before the business combination depends on whether:
I.the companies were independent at that time.
II.the sale transaction was the result of arm's-length bargaining.

Question

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The consolidation treatment of profits on inventory transfers that occurred before the business combination depends on both factors - whether the companies were independent at that time and whether the sale transaction was the result of arm's-length bargaining. If the companies were not independent at that time or if the sale transaction was not the result of arm's-length bargaining, then the profits on such inventory transfers should be eliminated or adjusted in the consolidated financial statements. Therefore, both I and II are relevant for determining the consolidation treatment of profits on inventory transfers.

The Consolidation Treatment of Profits on Inventory Transfers That Occurred