Chapter 2 Power Notes

Analyzing Transactions

Learning Objectives
1. Usefulness of an Account
2. Characteristics of an Account
3. Analyzing and Summarizing Transactions
4. Illustration of Analyzing and Summarizing
5. Trial Balance
6. Discovery and Correction of Errors
7. Financial Analysis and Interpretation

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Chapter 2 Power Notes
Analyzing Transactions

Slide # Power Note Topics

3 • Double-Entry Accounting
11 • Analyzing and Recording Transactions
36 • Chart of Accounts, Trial Balance
40 • Journal, Ledger, and Trial Balance
43 • Recording and Posting an Entry
50 • Correcting Errors
57 • Horizontal Analysis

Note: To select a topic, type the slide # and press Enter.

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 Double-Entry
Double-Entry Accounting
Accounting
“ Double-entry accounting is based on a
simple concept: each party in a business
transaction will receive something and give
something in return. In bookkeeping terms,
what is received is a debit and what is given
is a credit. The T account is a representation
of a scale or balance.”

Scale or Balance T account

Left Side Right Side

Receive Give
Luca Pacioli DEBIT CREDIT
Developer of
Double-Entry Receive Give
Accounting DEBIT CREDIT
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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Assets

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Assets

Expenses

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Liabilities
Assets

Expenses

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Liabilities
Assets
Owner’s Equity

Expenses

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Liabilities
Assets
Owner’s Equity

Revenues
Expenses

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Expanded
Expanded Accounting
Accounting Equation
Equation
“ The basic accounting equation can be
expanded to include all five financial categories
indicating what has been received and given.”

DEBITS CREDITS
received = given

Liabilities
Assets
Owner’s Equity
Net
Income
Revenues
Expenses

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 NetSolutions
NetSolutions
A
A Sole
Sole Proprietorship
Proprietorship

“ On November 1, 2002, I started a sole

proprietorship called NetSolutions. I plan to
use my knowledge of microcomputers and
offer computer consulting services for a fee.
The following double-entry transactions show
how amounts received (debits) always equal
amounts given (credits).”

Chris Clark,
Owner

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 Business Transactions
Entry A. Chris Clark (investor)

Chris Clark
deposits $25,000
in a bank account
for NetSolutions.

receive NetSolutions give

give
Debit (investee) Credit
Credit

General Journal
Date Description Debit Credit

11/1

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 Business Transactions
Entry A. Chris Clark (investor)

Chris Clark
deposits $25,000 Cash
in a bank account
for NetSolutions.

receive NetSolutions give

give
Debit (investee) Credit
Credit

General Journal
Date Description Debit Credit

11/1 Cash 25,000

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 Business Transactions
Entry A. Chris Clark (investor)

Chris Clark
deposits $25,000 Cash A promise
in a bank account to the owner
for NetSolutions.

receive NetSolutions give

give
Debit (investee) Credit
Credit

General Journal
Date Description Debit Credit

11/1 Cash 25,000

Chris Clark, Capital 25,000

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 Business Transactions
Entry B. Land Owner (seller)

NetSolutions buys
land for $20,000.

receive NetSolutions give

give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/5

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 Business Transactions
Entry B. Land Owner (seller)

NetSolutions buys
land for $20,000. Land

receive NetSolutions give

give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/5 Land 20,000

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 Business Transactions
Entry B. Land Owner (seller)

NetSolutions buys
land for $20,000. Land Cash

receive NetSolutions give

give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/5 Land 20,000

Cash 20,000

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 Business Transactions
Entry C. Supplier (seller)

NetSolutions buys
supplies for
$1,350, agreeing to
pay in the near
future.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/10

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 Business Transactions
Entry C. Supplier (seller)

NetSolutions buys
supplies for Supplies
$1,350, agreeing to
pay in the near
future.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/10 Supplies 1,350

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 Business Transactions
Entry C. Supplier (seller)

NetSolutions buys
supplies for Supplies A promise
$1,350, agreeing to to pay later
pay in the near
future.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

11/10 Supplies 1,350

Accounts Payable 1,350

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 Business Transactions
Entry D. Customer (buyer)

NetSolutions
earns fees of
$7,500, receiving
cash.

receive NetSolutions give

give
Debit (seller) Credit
Credit

General Journal
Date Description Debit Credit

11/18

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 Business Transactions
Entry D. Customer (buyer)

NetSolutions
earns fees of Cash
$7,500, receiving
cash.

receive NetSolutions give

give
Debit (seller) Credit
Credit

General Journal
Date Description Debit Credit

11/18 Cash 7,500

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 Business Transactions
Entry D. Customer (buyer)

NetSolutions
earns fees of Cash Services
$7,500, receiving
cash.

receive NetSolutions give

give
Debit (seller) Credit
Credit

General Journal
Date Description Debit Credit

11/18 Cash 7,500

Fees Earned 7,500

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 Business Transactions
Entry E. Various suppliers

NetSolutions paid:
wages, $2,125; rent,
$800; utilities, $450;
and miscellaneous,
$275.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit

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 Business Transactions
Entry E. Various suppliers

NetSolutions paid:
Services,
wages, $2,125; rent,
benefits
$800; utilities, $450;
and miscellaneous,
$275.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
Utilities Expense 450
Misc. Expense 275

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 Business Transactions
Entry E. Various suppliers

NetSolutions paid:
Services,
wages, $2,125; rent, Cash
benefits
$800; utilities, $450;
and miscellaneous,
$275.
receive NetSolutions give
give
Debit (buyer) Credit
Credit

General Journal
Date Description Debit Credit
11/18 Wages Expense 2,125
Rent Expense 800
Utilities Expense 450
Misc. Expense 275
Cash 3,650
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 Business Transactions
Entry F. Supplier (payee)

NetSolutions pays
$950 to creditors
on account.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30

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 Business Transactions
Entry F. Supplier (payee)

NetSolutions pays
Reduction in
$950 to creditors
obligation
on account.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Accounts Payable 950

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 Business Transactions
Entry F. Supplier (payee)

NetSolutions pays
Reduction in
$950 to creditors Cash
obligation
on account.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Accounts Payable 950

Cash 950

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 Business Transactions
Entry G. Internal Transaction
(no external entity)
At the end of the
month, the cost of
supplies on hand
is $550.

receive NetSolutions give

give
Debit (user) Credit
Credit

General Journal
Date Description Debit Credit

11/30

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 Business Transactions
Entry G. Internal Transaction
(no external entity)
At the end of the
month, the cost of Use of
supplies on hand supplies
is $550.

receive NetSolutions give

give
Debit (user) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Supplies Expense 800

Balance of Supplies account $1,350 less $550 on hand = $800 used

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 Business Transactions
Entry G. Internal Transaction
(no external entity)
At the end of the
month, the cost of Use of
supplies Supplies
supplies on hand
is $550.

receive NetSolutions give

give
Debit (user) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Supplies Expense 800

Supplies 800

Balance of Supplies account $1,350 less $550 on hand = $800 used

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 Business Transactions
Entry H. Chris Clark (payee)

Chris Clark
withdraws $2,000
in cash.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30

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 Business Transactions
Entry H. Chris Clark (payee)

Chris Clark
Reduction in
withdraws $2,000
obligation
in cash.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Chris Clark, Drawing 2,000

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 Business Transactions
Entry H. Chris Clark (payee)

Chris Clark
Reduction in
withdraws $2,000 Cash
obligation
in cash.

receive NetSolutions give

give
Debit (payor) Credit
Credit

General Journal
Date Description Debit Credit

11/30 Chris Clark, Drawing 2,000

Cash 2,000

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 NetSolutions
Chart of Accounts

Balance Sheet Income Statement

1. Assets 4. Revenue
11 Cash 41 Fees Earned
12 Accounts Receivable
14 Supplies 5. Expenses
51 Wages Expense
15 Prepaid Insurance
17 Land 52 Rent Expense
18 Office Equipment 54 Utilities Expense
55 Supplies Expense
2. Liabilities 59 Miscellaneous
21 Accounts Payable Expense
23 Unearned Rent
3. Owner’s Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

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 NetSolutions
Trial Balance
November 30, 2002
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450
55 Supplies Expense 800
59 Miscellaneous Expense 275
32,900 32,900

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 NetSolutions
Trial Balance
November 30, 2002
11 Cash 5,900
14 Supplies 550
Balance 17 Land 20,000
Sheet 21 Accounts Payable 400
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
52 Rent Expense 800
54 Utilities Expense 450
55 Supplies Expense 800
59 Miscellaneous Expense 275
32,900 32,900

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 NetSolutions
Trial Balance
November 30, 2002
11 Cash 5,900
14 Supplies 550
17 Land 20,000
21 Accounts Payable 400
31 Chris Clark, Capital 25,000
32 Chris Clark, Drawing 2,000
41 Fees Earned 7,500
51 Wages Expense 2,125
Income 52 Rent Expense 800
Statement 54 Utilities Expense 450
55 Supplies Expense 800
59 Miscellaneous Expense 275
32,900 32,900

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 Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.
Documents
Journal

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 Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.
Documents
Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger

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 Journal, Ledger, Trial Balance

1. Transactions are analyzed

and recorded in journal.
Documents
Journal

2. Transactions are posted

from journal to ledger.
Journal Ledger

3. Trial balance is prepared.

Trial Balance

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.
3. Post the credit side of the transaction.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400
1 General Ledger
Account: Prepaid Insurance Account No. 15
Post. Balance
Date Item Ref. Debit Credit Debit Credit
12/1

1 Enter the transaction date in the ledger account.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

General Ledger 2

Account: Prepaid Insurance Account No. 15

Post. Balance
Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400

2 Enter the debit amount in the ledger debit column.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

General Ledger
Account: Prepaid Insurance Account No. 15
Post. Balance
Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400 2,400
3

3 Update the ledger account balance.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400

General Ledger 4

Account: Prepaid Insurance Account No. 15

Post. Balance
Date Item Ref. Debit Credit Debit Credit
12/1 1

4 Enter the journal page in the ledger account.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 2,400
5
General Ledger
Account: Prepaid Insurance Account No. 15
Post. Balance
Date Item Ref. Debit Credit Debit Credit
12/1 1 2,400 2,400

5 Enter the ledger account number in the journal.

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 Recording and Posting an Entry
General Journal Page 1
Post.
Date Description Ref. Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 11 2,400
1 4 5 2
General Ledger
Account: Cash Account No. 11
Post. Balance
Date Item Ref. Debit Credit Debit Credit
11/30 Balance 5,900
12/1 1 2,400 3,500
3

All five parts of the credit posting are shown.

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 Correcting Errors
Three Types of Errors
Journal Entry Ledger Posting Correction Procedure

1. incorrect not posted correct Journal

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 Correcting Errors
Three Types of Errors
Journal Entry Ledger Posting Correction Procedure

1. incorrect not posted correct Journal

2. correct incorrectly posted correct Ledger

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 Correcting Errors
Three Types of Errors
Journal Entry Ledger Posting Correction Procedure

1. incorrect not posted correct Journal

2. correct incorrectly posted correct Ledger
3. incorrect already posted record and post
a correcting entry

Error 3 requires a correcting journal entry.

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 Correcting Errors – An Example

On May 5 a purchase of office equipment on account

was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

What part of this entry is incorrect?

What correcting entry would you make?

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 Correcting Errors – An Example

On May 5 a purchase of office equipment on account

was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5

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 Correcting Errors – An Example

On May 5 a purchase of office equipment on account

was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5 Office Equipment 12,500

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 Correcting Errors – An Example

On May 5 a purchase of office equipment on account

was incorrectly journalized and posted as shown.

General Journal – As recorded and posted

Date Description Debit Credit

5/5 Supplies 12,500

Accounts Payable 12,500

General Journal – A correcting entry

Date Description Debit Credit

5/5 Office Equipment 12,500

Supplies 12,500

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 Financial Analysis and Interpretation

Objective: Use horizontal analysis to compare financial

statements from different periods.

Comparative Balance Sheet

December 31, 2003 and 2002 Increase (Decrease)
Assets 2003 2002 Amount Percent
Current assets $ 550,000$ 533,000
Long-term investments 95,000177,500
Plant assets (net) 444,500470,000
Intangible assets 50,00050,000
$1,139,500$1,230,500

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 Financial Analysis and Interpretation

Objective: Use horizontal analysis to compare financial

statements from different periods.

Comparative Balance Sheet

December 31, 2003 and 2002 Increase (Decrease)
Assets 2003 2002 Amount Percent
Current assets $ 550,000$ 533,000$ 17,000 3.2%
Long-term investments 95,000177,500(82,500) (46.5%)
Plant assets (net) 444,500470,000(25,500)
Horizontal Analysis: (5.4%)
Intangible assets 50,00050,000 —
$1,139,500$1,230,500$ (91,000)(7.4%)
Current year (2003) $550,000
= 103.2%
Base year (2002) $533,000

Increase amount $17,000

= 3.2%
Base year (2002) $533,000

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 Financial Analysis and Interpretation

Objective: Use horizontal analysis to compare financial

statements from different periods.

Comparative Income Statement

December 31, 2003 and 2002 Increase (Decrease)
2003 2002 Amount Percent
Sales $1,530,500 $1,234,000
Sales returns 32,500 34,000
Net sales $1,498,000 $1,200,000
Cost of goods sold 1,043,000 820,000
Gross profit $ 455,000 $ 380,000

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 Financial Analysis and Interpretation

Objective: Use horizontal analysis to compare financial

statements from different periods.

Comparative Income Statement

December 31, 2003 and 2002 Increase (Decrease)
2003 2002 Amount Percent
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000) 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Horizontal Analysis:
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Current year (2003) $1,498,000
= 124.8%
Base year (2002) $1,200,000

Increase amount $298,000

= 24.8%
Base year (2002) $1,200,000

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Chapter 2 Power Notes
Analyzing Transactions

This is the last slide in Chapter 2.

Note: To see the topic slide, type 2 and press Enter.

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