Impact of Defined Contribution Plans on Financial Statements

Easy Employee Compensation Defined Contribution Plans

XYZ Corporation offers a 401(k) defined contribution plan to its employees. Under this plan, the company matches employee contributions up to 5% of their salaries. Each year, its employees can choose how much of their pre-tax earnings to contribute to the plan, and the funds may be directed into various investment options provided by the plan.

What impact does the 401(k) defined contribution plan have on XYZ Corporation's financial statements?

The employer's contributions are recognized as an expense in the income statement during the period they are incurred.

The employer's contributions are recorded as a liability until they are paid out to employees.

Employee contributions are treated as an asset on the balance sheet of the company.

Hint

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