Defined Contribution Plans Accounting Treatment

Hard Employee Compensation Defined Contribution Plans

ABC Corporation, a large manufacturing firm, offers a defined contribution plan to its employees. Under this plan, the company contributes 5% of each employee's salary to a retirement account, and employees are allowed to make voluntary contributions up to 3% of their salary. The contributions made by ABC Corporation are fully vested immediately, allowing employees to retain the full amount regardless of how long they remain with the company.

In the most recent financial statement, ABC Corporation reported a total compensation expense that included the contributions to the defined contribution plan. Given this information, which of the following statements is true regarding the accounting treatment for the defined contribution plan?

The contributions made by ABC Corporation are recognized as an expense in the period they are contributed, while voluntary contributions by employees do not impact the expense reported.

Both the employer's contributions and employee's voluntary contributions are recognized as liabilities until paid.

Employer contributions do not affect the company’s earnings per share as they are recorded directly under equity.

Hint

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