Question

ABC Ltd. has a 15% holding in the shares of XYZ Ltd. In addition, ABC has, through one of its subsidiaries, a currently exercisable option to buy 15% more shares in XYZ. Although the exercise price is in the money, ABC does not have the intention and the financial ability to exercise this option. How should this investment be classified?

a.An associate
b.A subsidiary
c.A joint arrangement
d.An investment

Answer 1

The investment of ABC Ltd. in XYZ Ltd. should be classified as d. 'An investment.'

Step-by-step explanation:

Investment involves allocating resources, typically money, with the expectation of generating income or profit. Investors deploy funds into various assets, such as stocks, bonds, real estate, or businesses, aiming to achieve returns over time. Investment decisions are influenced by risk tolerance, financial goals, and market conditions.

According to the information provided, the investment of ABC Ltd. in XYZ Ltd. should be classified as 'An investment.' This is because ABC Ltd. has a 15% holding in the shares of XYZ Ltd. and also has an option to buy 15% more shares. However, ABC Ltd. does not have the intention and financial ability to exercise this option. Therefore, it is considered as an investment rather than an associate or a subsidiary.

Answer 2

ABC Ltd.'s 15% holding in XYZ Ltd. with an unexercised option for an additional 15% does not imply control or significant influence. Therefore, the investment is classified as. An investment, considering ABC's lack of intention and financial ability to exercise the option.

Step-by-step explanation:

When assessing the classification of ABC Ltd.'s investment in XYZ Ltd., we must consider the existing 15% holding and the option to acquire an additional 15% of shares. Given that ABC Ltd. has neither the intention nor the financial ability to exercise the option, and the relationship does not meet the criteria for an associate, subsidiary, or joint arrangement, the investment is best classified as d. An investment.

Companies tend to choose financial capital strategies based on various factors, including the desire to maintain control, the stage of growth, and the need for financial resources. Issuing stock, unlike issuing bonds or borrowing money, does not obligate the company to make payments, although it may dilute control if a significant proportion of the company is sold off.

In the case of ABC Ltd., because there is no significant influence or control over XYZ Ltd. with only a 15% share and no intention to exercise the option to increase that share, ABC Ltd.'s holding is merely an investment rather than an associate, subsidiary, or joint arrangement.