Final answer:
The gain for AFS securities is recorded in the accumulated other comprehensive income (AOCI) account in the balance sheet until the securities are sold, at which point it is transferred to the income statement as a realized gain on AFS securities.
Step-by-step explanation:
For Available-for-Sale (AFS) securities, the gain is recorded in the balance sheet as part of the accumulated other comprehensive income (AOCI) account. AOCI is a component of shareholders' equity and represents the unrealized gains and losses on AFS securities that have not yet been realized through a sale or disposal.
When a gain is realized through the sale of an AFS security, it is then transferred from AOCI to the income statement, specifically the line item for gains on AFS securities.
For example, let's say a company holds AFS securities with a fair value of $10,000 and a cost of $8,000. If the fair value increases to $12,000, resulting in a gain of $2,000, the gain will be recorded in AOCI until the securities are sold. Once sold, the $2,000 gain will be transferred to the income statement as a realized gain on AFS securities.