P owns 80 percent of S1, and S1 owns 70 percent of S2. Separate incomes of P,

Question:

P owns 80 percent of S1, and S1 owns 70 percent of S2. Separate incomes of P, S1, and S2 are $20,000, $10,000, and $5,000, respectively, for 2011. During 2011, S1 sold land to P at a gain of $1,000. Compute S1’s income on an equity basis. Discuss why you did or did not adjust S1’s investment in S2’s account for the unrealized gain.