7. X owns 100% of the common shares of Y. Both companies pay income tax at the rate of 40%. On January 1^st.2020, X reported a gain of $20,000 when it sold equipment to Y. This equipment had a remaining life of 5 years on the date of the intercompany sale. When preparing the consolidated income statement for 2021, what adjustment should be made to income tax expense?
   1. Increase it by $1,600
   2. Decrease by $1,600
   3. Increase it by $4,800
   4. Decrease it by $4,800.