Final answer:
For AFS securities, gains or losses are recorded in the other comprehensive income section of the balance sheet and are transferred to the realized gain/loss section of the income statement upon sale.
Step-by-step explanation:
For Available-for-Sale (AFS) securities, gains or losses are recorded in the other comprehensive income section of the balance sheet.
When an AFS security is sold, the gain or loss is transferred from other comprehensive income to the realized gain/loss section of the income statement.
For example, let's say a company owns AFS securities with an initial cost of $10,000. At the end of the year, the market value of the securities has increased to $12,000. The $2,000 unrealized gain will be recorded in the other comprehensive income section of the balance sheet. If the company decides to sell the securities, the $2,000 gain will be transferred to the realized gain/loss section of the income statement.