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Accounting: A Malaysian Perspective, 4
th
ed
(Adapted from Accounting 22
nd
ed)
Warren, Reeve and Duchac
Completing the
Accounting Cycle
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1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
5. Prepare the Financial Statement
6. Prepare the Closing Entries
After completing this chapter, you should be able to:
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TWO METHODS
Reporting Revenue and Expense
Cash Basis of Accounting
Accrual Basis of Accounting
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Cash Basis of Accounting
Revenue reported when cash is received
Expense reported when cash is paid
Does not properly match revenues and
expenses
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Accrual Basis of Accounting
Revenue reported when earned
Expense reported when incurred
Properly matches revenues and expenses
in determining net income
Requires adjusting entries at end of period
It just sounds mean it really isnt
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The Matching Concept
Assets
Liabilities
Owners
Equity
Debits = Credits
Expenses Revenues
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The Matching Concept
Assets
Liabilities
Owners
Equity
Debits = Credits
Expenses Revenues
Net
Income
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The Matching Concept
Assets
Liabilities
Owners
Equity
Debits = Credits
Net income is determined by properly
matching expenses and revenues.
Expenses Revenues
Net
Income
matching
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800

Assets
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360

Liabilities
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 4,000

Owners
Equity
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 4,000
41 Fees Earned 16,340

Revenue
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600
Expenses
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NetSolutions
Unadjusted Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,220
14 Supplies 2,000
15 Prepaid Insurance 2,400
17 Land 20,000
18 Office Equipment 1,800
21 Accounts Payable 900
23 Unearned Rent 360
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 4,000
41 Fees Earned 16,340
51 Wages Expense 4,275
52 Rent Expense 1,600
54 Utilities Expense 985
55 Supplies Expense 800
59 Miscellaneous Expense 455
42,600 42,600
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NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Land
18 Office Equipment
19 Accumulated Depreciation

2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue

5. Expenses
51 Wages Expense
52 Rent Expense
53 Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56 Insurance Expense
59 Miscellaneous Expense
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NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Land
18 Office Equipment
19 Accumulated Depreciation

2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue

5. Expenses
51 Wages Expense
52 Rent Expense
53 Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56 Insurance Expense
59 Miscellaneous Expense
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NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Land
18 Office Equipment
19 Accumulated Depreciation

2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue

5. Expenses
51 Wages Expense
52 Rent Expense
53 Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56 Insurance Expense
59 Miscellaneous Expense
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NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Land
18 Office Equipment
19 Accumulated Depreciation

2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue

5. Expenses
51 Wages Expense
52 Rent Expense
53 Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56 Insurance Expense
59 Miscellaneous Expense
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NetSolutions
Expanded Chart of Accounts
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Land
18 Office Equipment
19 Accumulated Depreciation

2. Liabilities
21 Accounts Payable
22 Wages Payable
23 Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing
4. Revenue
41 Fees Earned
42 Rent Revenue

5. Expenses
51 Wages Expense
52 Rent Expense
53 Depreciation Expense
54 Utilities Expense
55 Supplies Expense
56 Insurance Expense
59 Miscellaneous Expense
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Adjustments Deferrals and Accruals
Current Period Future Period
Cash Received Revenue Recorded Deferrals Cash Received
Revenues
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Adjustments Deferrals and Accruals
Current Period Future Period
Cash Received Revenue Recorded Deferrals Cash Received
Accruals Revenue Recorded Cash Received
Revenues
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Adjustments Deferrals and Accruals
Current Period Future Period
Cash Received Revenue Recorded Deferrals Cash Received
Current Period Future Period
Cash Paid Expense Recorded
Expenses
Cash Paid
Accruals Revenue Recorded Cash Received
Revenues
Deferrals
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Adjustments Deferrals and Accruals
Current Period Future Period
Cash Received Revenue Recorded Deferrals Cash Received
Current Period Future Period
Expense Recorded Cash Paid
Cash Paid Expense Recorded
Expenses
Cash Paid
Accruals Revenue Recorded Cash Received
Revenues
Deferrals
Accruals
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Adjustments Deferred Expense
P1..... 2,400
Cash
Prepaid Insurance
Insurance Expense
P1..... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A1 Record
insurance used for
December, $100.
Expenses
Assets
Example P1 Purchase initially recorded as an asset.
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Adjustments Deferred Expense
P1..... 2,400
Cash
Prepaid Insurance
Insurance Expense
P1..... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A1 Record
insurance used for
December, $100.
A1..... 100
A1.....100
Expenses
Assets
A1
Example P1 Purchase initially recorded as an asset.
A1
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Adjustments Deferred Expense
P2..... 2,400
Cash
Prepaid Insurance
Insurance Expense
P2..... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A2 Record
insurance unused as of
December 31.
Expenses
Assets
Example P2 Purchase initially recorded as an expense.
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Adjustments Deferred Expense
P2..... 2,400
Cash
Prepaid Insurance
Insurance Expense
P2..... 2,400
On December 1, NetSolutions purchased insurance
for 24 months at a cost of $2,400.
Adjustment A2 Record
insurance unused as of
December 31.
A2..... 2,300
A2.....2,300
Expenses
Assets
A2
Example P2 Purchase initially recorded as an expense.
A2
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Adjustments Deferred Revenue
Cash
Unearned Rent
Rent Revenue
S1..... 360
On December 1, NetSolutions received cash of $360 for
three months rent beginning December 1.
Adjustment A3 Record rent
earned for December.
S1..... 360
Revenues
Liabilities
Example S1 Sale initially recorded as a liability.
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Adjustments Deferred Revenue
A3..... 120
Cash
Unearned Rent
Rent Revenue
S1..... 360
On December 1, NetSolutions received cash of $360 for
three months rent beginning December 1.
Adjustment A3 Record rent
earned for December.
S1..... 360
A3.....120
Revenues
Liabilities
A3
Example S1 Sale initially recorded as a liability.
A3
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Adjustments Deferred Revenue
Cash
Unearned Rent
Rent Revenue
S2..... 360
On December 1, NetSolutions received cash of $360 for
three months rent beginning December 1.
Adjustment A4 Record rent
unearned as of December 31.
S2.....360 Revenues
Liabilities
Example S2 Sale initially recorded as revenue.
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Adjustments Deferred Revenue
A4..... 240
Cash
Unearned Rent
Rent Revenue
S2..... 360
On December 1, NetSolutions received cash of $360 for
three months rent beginning December 1.
Adjustment A4 Record rent
unearned as of December 31.
A4..... 240
S2.....360 Revenues
Liabilities
A4
Example S2 Sale initially recorded as revenue.
A4
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Adjustments Accrued Expense
Wages Payable
Wages Expense
NetSolutions received employee services for the last two
days of December amounting to $250, to be paid later.
Adjustment A5 Record accrued wages of $250.
Bal.....4,275
Expenses
Liabilities
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Adjustments Accrued Expense
Wages Payable
Wages Expense
NetSolutions received employee services for the last two
days of December amounting to $250, to be paid later.
Adjustment A5 Record accrued wages of $250.
A5..... 250
Bal.....4,275
Expenses
Liabilities
A5
A5
A5.....250
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Adjustments Accrued Revenue
Accounts Receivable
Fees Earned
As of December 31, NetSolutions provided 25 hours of
services at $20 per hour to be billed next month.
Adjustment A6 Record accrued fees earned of $500.
Bal....16,340
Revenues
Assets
Bal.....2,220
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Adjustments Accrued Revenue
Accounts Receivable
Fees Earned
As of December 31, NetSolutions provided 25 hours of
services at $20 per hour to be billed next month.
Adjustment A6 Record accrued fees earned of $500.
A6..... 500
Bal....16,340
Revenues
Assets
A6
A6
A6.....500
Bal.....2,220
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Summary of Adjustments
Deferred
Expenses
Expenses
Assets
A1 A2
Buying Side
Rearranging
the Debits
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Summary of Adjustments
Deferred
Expenses
Expenses
Assets
A1 A2
Deferred
Revenues
Revenues
Liabilities
A3 A4
Buying Side Selling Side
Rearranging
the Debits
Rearranging
the Credits
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Summary of Adjustments
Expenses
Liabilities
A5
Accrued
Expenses
Buying Side Selling Side
Adding a New
Transaction
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Summary of Adjustments
Expenses
Liabilities
A5
Revenues
Assets
A6
Accrued
Expenses
Buying Side Selling Side
Adding a New
Transaction
Adding a New
Transaction
Accrued
Revenues
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Summary of Adjustments
Deferred
Expenses
Expenses
Assets
A1 A2
Expenses
Liabilities
A5
Deferred
Revenues
Revenues
Liabilities
A3 A4
Revenues
Assets
A6
Accrued
Expenses
Buying Side Selling Side
Rearranging
the Debits
Adding a New
Transaction
Rearranging
the Credits
Adding a New
Transaction
Accrued
Revenues
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NetSolutions
Income Statement
For Two Months Ended December 31, 2002
Fees earned $16,840
Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205

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NetSolutions
Statement of Owners Equity
For Two Months Ended December 31, 2002
Chris Clark, capital, November 1, 2002 $ 0
Investment on November 1, 2002 $15,000
Net income for November and December 7,205
$22,205
Less withdrawals 4,000
Increase in owners equity 18,205
Chris Clark, capital, December 31, 2002 $18,205

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NetSolutions
Balance Sheet
December 31, 2002
ASSETS
Current assets:
Cash $ 2,065
Accounts receivable 2,720
Supplies 760
Prepaid insurance 2,300
Total current assets $ 7,845
Property, plant, and
equipment:
Land $20,000
Office equipment 1,800
Less accum. depr. (50)
Total property, plant,
and equipment 11,750
Total assets $29,595
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NetSolutions
Balance Sheet
December 31, 2002
LIABILITIES
Current liabilities:
Accounts payable $ 900
Wages payable 250
Unearned rent 240
Total liabilities $ 1,390

OWNERS EQUITY
Chris Clark, capital 28,205
Total liabilities and
owners equity $29,595
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Chris Clark, Capital
Bal. 15,000
Chris Clark, Drawing
Bal. 4,000
Income Summary





Note: The balances
shown are adjusted
balances before closing.
The following sequence
demonstrates the closing
process.
The Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
Income Summary
16,960
Chris Clark, Capital
Close Revenues
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Total
Revenues
The Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
4,525
1,600
50
985
2,040
100
455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
Income Summary
16,960 9,755
Chris Clark, Capital
Close Revenues
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Close Expenses
Total
Expenses
Total
Revenues
The Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
4,525
1,600
50
985
2,040
100
455
Fees Earned
Bal. 16,840
Rent Income
Bal. 120
16,840
120
Income Summary
16,960 9,755
Chris Clark, Capital
Close Revenues
Bal. 15,000
Chris Clark, Drawing
Bal. 4,000
Close Expenses
The Closing Process
7,205
7,205
Close Income Summary
Net Income
Closed
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
4,525
1,600
50
985
2,040
100
455
Fees Earned
Bal. 16,840
Rent Income
Bal. 120
16,840
120
Income Summary
16,960 9,755
Chris Clark, Capital
Close Revenues
Bal. 15,000
Chris Clark, Drawing
Bal. 4,000
Close Expenses
The Closing Process
7,205
7,205
Close Income Summary
Net Income
4,000
4,000
Close Drawing
Drawing
Closed
Closed
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Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense
Fees Earned
Rent Income
Income Summary
Chris Clark, Capital
Bal. 15,000
Chris Clark, Drawing
Net Income
Drawing
Bal. 18,205
All temporary accounts
now have zero balances
and are ready for the
next accounting period.
7,205
4,000
The Closing Process
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NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645
Assets
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NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 19,645
Liabilities
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NetSolutions
Post-Closing Trial Balance
December 31, 2002
11 Cash 2,065
12 Accounts Receivable 2,720
14 Supplies 760
15 Prepaid Insurance 2,300
17 Land 20,000
18 Office Equipment 1,800
19 Accum. Depreciation 50
21 Accounts Payable 900
22 Wages Payable 250
23 Unearned Rent 240
31 Chris Clark, Capital 28,205
29,645 29,645
Owners
Equity
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This is the last slide in Chapter 3.
Power Notes
Analyzing Transactions
Chapter 3
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