Final answer:
Gain on sale for AFS securities is recorded in the income statement, affecting net income and earnings per share. It transfers from other comprehensive income in equity to net income, as required by GAAP. This ensures financial statements reflect investment value changes accurately.
Step-by-step explanation:
The gain on sale for Available-for-Sale (AFS) securities is usually recognized in the income statement. When a company sells AFS securities, the difference between the sale proceeds and the carrying amount of the investment is considered either a gain or a loss. This carrying amount is the original acquisition cost adjusted for any previous gains or losses that were recognized as other comprehensive income (OCI) and accumulated in equity.
Upon the sale of the AFS security, the gain is transferred out of OCI and included in net income for the period. Consequently, the gain on sale affects the company's profit or loss, and it impacts earnings per share calculations. This transaction is also reflected in the equity section of the balance sheet, as the accumulated other comprehensive income balance is reduced by the amount of the gain that has been reclassified to net income.
Generally Accepted Accounting Principles (GAAP) require that all realized gains and losses, including those from AFS securities, be included in determining net income. This ensures that financial statements accurately reflect all changes in the value of a company's investments.