Defined Contribution Plan Accounting Treatment

Very Hard Employee Compensation Defined Contribution Plans

XYZ Corp is a mid-sized technology firm that sponsors a defined contribution plan for its employees. Under this plan, employees contribute a percentage of their salary into their individual accounts, and the company matches these contributions up to a specified limit. In the current year, the company's total contribution amounted to $1.2 million, which included employee contributions of $800,000 and a company match of $400,000.

XYZ Corp also follows a calendar year accounting period, and the finance team is reviewing the financial statements to ensure the treatment of the defined contribution plan is appropriately reflected. As part of this review, the team must understand the implications of the defined contribution plan on the company's financial position and performance metrics.

Which of the following statements correctly describes the accounting treatment and reporting for XYZ Corp's defined contribution plan?

The total contribution of $1.2 million should be reported as an expense on the income statement in the period it is incurred.

Employee contributions are classified as a liability on the balance sheet until they are matched by the company.

The company's matching contributions reduce the operating income for the period in which they are made, influencing the EBITDA calculation.

Hint

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