Problem:
Pamello Inc., an engineering consulting firm, uses the cash method of accounting. Compute the amount of Pamello's current year deductions for the following transactions:
On November 1 of the current year, it entered into a lease to rent some office space for five years. The lease agreement states that the lease payments are $12,000 per year, payable in advance each November 1 for the following 12-month period. Under the terms of the lease, Pamello is required to pay a $5,000 deposit, refundable upon the termination of the lease. What is his current year deduction amount?
- $12,000
- $7,000
- $5,000
- $2,000
Note: Explain all steps comprehensively.