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TRUSTEE
The Debenture Deed will appoint a trustee for the debenture holders whose work is to safe guard the interest of the debenture holders. On the breach of the Trust deed, the trustee will appoint a receiver who will seize the security (property) and apply if for the benefit of the debenture holders’ arrangement for the repayment of the debenture issue.
REDEMPTION OF DEBENTURES
Debentures can be bought back (redeemed) using the following methods:-
(a) Sinking fund method / Debenture Redemption fund method.
Under this method a fixed sum calculated from the sinking fund tables is set aside and invested in outside securities which together with interest compounded annually and calculated using a fixed rate, a sufficient sum will them be available to redeem (repay & the debentures on their maturity.
(i) At the end of the first year:-
(a) Dr. P & L appropriation A/c with the annual appro.
Cr. Sinking fund A/c / Debenture redemption sum set aside.
(b) Dr. Sinking fund investment A/c / Debenture Redemption fund
Investment A/c.
Cr. Cash / Bank A/c with the equipment amount invested.
(ii) At the end of the second and subsequent years.
Dr. P. & L appropriation A/c with interest received on investment
Cr. Sinking Fund A/c
(b) Dr. Cash / Bank A/c with interest received on investment.
Cr. Sinking Fund A/c
(c)Dr. Sinking Fund investment A/c with both the fixed sum (+)
Cr. Cash / Bank A/c interest now being re invested.
(iii) At the end of the final year (the year of redemption:-
(a) Dr. P& L appropriation A/c with the fixed sum set a side
Cr. Sinking fund A/c investment
(b) Dr. Cash / Bank A/c with interest received on investment
Cr. Sinking fund A/c
NB: At the end of the final years, no further investment is made instead of security will be sold out.
Entries :-
(i) Dr. Cash / Bank A/c with cash received on sale of the
Cr. Sinking fund investment A/c investment.
(ii)Dr. Sinking Fund Investment A/c with profit on sale of the investment
Cr. Sinking fund A/c
NB: The balancing figure on the sinking fund A/c after the debentures have been redeemed, will be transferred to the general reserve.
Entry:-
Dr. Sinking fund A/c with transfer of the balance
Cr. Reserve A/c
EXERCISE
Debentures of Tshs. 30000 are issued on 1st Jan. 2003. Redemption is to take place on equal terms four years later. The company decided to set aside an equal amount to be invested at 5% which will provide Tshs. 30000 on maturity. Tables show that Tshs. 0.232012 invested annually will produce sh. 1 in 4 years time.
You’re required to show:-
(a)Debenture redemption reserve A/c (sinking fund / Debentures redemption A/c)
(b)Debenture sinking fund investment A/c
(c)Debentures
(d) Profit and Loss extracts
DR SINKING FUND ACCOUNT CR
| | | 1.1.2004 | Balance b/d | 6960 |
31.12.04 | balance c/d | 14,268 | 31.12.04 | P & L Appr. | 6960 |
| | | 31.12.04 | cash(interest) | 348 |
| | 14268 | | | 14268 |
| | | | | |
| | | 1/1/2005 | Balance b/d | 14,268 |
| | | 31.12.05 | P & L Appr | 6960 |
31.12.05 | balance c/d | 21941 | | cash(interest) | 713 |
| | 21941 | | | 21941 |
| | | | | |
| | | 1/1/2006 | Balance b/d | 21941 |
31.12.06 | Debenture Reserve | 30,000 | 31.12.06 | P & L Appr | 6960 |
| | 8057 | 31.12.06 | cash(interest) | 1097 |
| | | 31.12.06 | Deb.sink.fund inv. | 8059 |
| | 38057 | | | 38057 |
| | | | | |
PURCHASE IN THE OPEN MARKET
At times a company can buy its own debentures in the open market. This practice should be allowed by the terms of issue.
This brings a financial sense if the market value is below the present value of the further interest payments plus the sum payable on redemption.
The debentures can be bought back for cancellation. The purchase of debentures in the open market can be ex-int or cum – int.
If it is ex – int, then this means it is without interest, and therefore interest has to be calculated and added to the purchase price.
And if it’s cum – int, then this means it is with interest and therefore for recording purpose, the interest included should be deducted from the total price paid.
Entries:-
Purchases of debentures for cancellation
(i)Purchase of own debentures in the open market.
Dr. Investment in own debentures A/c
Cr. Cash / Bank A/c
(ii)Pre – acquisition interest included in the purchase price.
Dr. Debenture interest A/c
Cr. Investment in own debentures A/c
(iii)Cancellation of the debentures (Nominal value)
Dr. Redeemable debentures
Cr. Investment in own debentures A/c
(iv)Profit on cancellation of the debentures.
Dr. Investment in own debentures A/c
Cr. Sinking fund A/c / Debenture Redemption fund A/c
(v)The balance on the sinking fund A/c after all the debentures has been cancelled.
Dr. sinking fund A/c
Cr. Reserve A/c
Example:-
Super Mnyanyue Company had some years ago issued Tshs. 400,000 12% redeemable debentures. Under the terms of the trust deed the debentures would be redeemed or bought back on the open market at anytime. A sinking fund had been established for this purpose.
On 1st January 1998 the balance on debenture redemption fund was Tshs. 152400 and on debenture redemption fund investment Tshs. 112800.
The following transactions occurred during 1999:-
Jan. 14: Sinking fund investment bought Tshs. 38100.
May 16: Sinking fund investment income received Tshs. 8700
June 30: Debenture interest paid for half year Tshs. 24000
Sept. 15: Sinking fund investment sold (costing Tshs. 57000), Tshs. 61200
Sept. 30: Tshs. 60000/- debenture bought back on open moment at 97 and cancelled Tshs. 58200.
Oct. 16: Sinking fund income received Tshs. 5100.
Nov. 21: Sinking fund investment sold (cost Tshs. 43200) Tshs. 40,000.
Nov. 30: Tshs. 40000 debentures redeemed at 96 ci on open market and cancelled Tshs.
38400.
Dec.31: Debenture interest paid Tshs. 18000
Dec 31: Annual appropriation Tshs. 32000
Open, post and balance the appropriate accounts to record the above.
Solution:-
DR DEBENTURE REDEMPTION FUND ACCOUNT CR
21-Nov | Deb.Red fund inv. | 3200 | | Balance b/d | 152,400 |
31/12 | General reserve | 100,000 | 16-May | cash(income) | 8700 |
| | | | Deb.red.fund.inv | |
| | | | profit on sale | 4200 |
| | | 16-Oct | cash(income) | 5100 |
| | | 30-Sep | invest.in own deb(profit) | |
| | | 30-Nov | inv.in own(profit) | 3600 |
| | | 31-Dec | P & L A ppr | 32000 |
| | 209,600 | | | 209600 |
| | | | | |
DR DEBENTURE REDEMPTION FUND INVESTMENT ACCOUNT CR
1-Jan | Balance b/d | 112,800 | 16-Sep | cash | 61,200 |
14-Jan | cash(purchase) | 38,100 | 21-Nov | cash | 40,000 |
16-Sep | Deb.red.fund | | 21-Nov | Deb.Red.fund | 3200 |
| profit on sale | 4200 | | | |
| | | | Balance c/d | 50700 |
| | 155,100 | | | 155,100 |
| | | | | |
DR 12%DEBENTURE INTEREST ACCOUNT CR
30-Jun | cash | 24,000 | 31dec | P&l | 45,800 |
30-Sep | investment in own | 1800 | | | |
30-Nov | investment in own | 2000 | | | |
31-Dec | cash | 18,000 | | | |
| | 45,800 | | | 45,800 |
| | | | | |
DR INVESTMENT IN OWN DEBENTURE ACCOUNT CR
30-Sep | cash | 58200 | 30-Sep | 12% Deb.interest | 1800 |
30-Sep | Deb.Red fund(profit) | 3600 | 30-Sep | Redeem deb | 60,000 |
30-Nov | cash | 38400 | 30-Nov | Deb.interest | 2000 |
| Deb.Red fund(profit) | 3600 | 30-Nov | Redeem deb | 40,000 |
| | 103,800 | | | 103,800 |
| | | | | |
Interest included = 3 month 60,000 x 12 x 3 = 1800
100 12
Interest included = 5 month: 40,000 x 12 x 5 = 2000
100 12
DR 12% REDEEMABLE DEBENTURE ACCOUNT CR
30-Sep | invest in own | 60,000 | | Balance b/d | 400,000 |
30-Nov | invest in own | 40,000 | | | |
31-Dec | Bal.c/d | 300,000 | | | |
| | 400,000 | | | 400,000 |
EXERCISE
1. Eight years ago Trafalgar Co. Ltd had issued Tshs. 300,000 12% Debentures. Interest was payable on both June 30th and Dec. 31st. Under the terms of the trust deed, the debentures could be redeemed on bought back on the married at any time after 1st Jan. 1999. A sinking fund had been established for this purpose.
On 1st Jan. 1994, the balance on debentures redemption fund Tshs 246,250 and on debenture redemption fund investment Tshs. 203,500.
The following transactions took place for the year 1994:-
Jan: Sinking fund investment bought for Tshs. 42,600
May 25: Sinking fund investment income received Tshs. 9230.
June 30: Debenture interest paid 800
Aug. 14: Sinking fund investment sold (cost Tshs. 71,200) for Tshs. 79600.
Aug. 31 Tshs. 100,000 debentures bought back on open market at 97 cum – int and cancelled.
Sept. 30: Tshs. 100,000 debentures bought back on open market at 96 cum-int and cancelled.
Oct. 24: Sinking fund investment income received Tshs. 8920.
Dec. 19: Sinking fund investm
ent sold (cost Tshs. 82500) for Tshs. 81000
Dec. 31: Debenture interest paid
Dec 31: Annual appropriation Tshs. 44,000
Required:
Open post and balance the appropriate ledger accounts to record the above transactions.
DR DEBENTURES REDEMPTION ACCOUNT CR
19-Feb | Deb.red.fund.inve | 1500 | | Balance b/d | 246,250 |
31-Dec | General reserve | 200,000 | 25-May | cash(income) | 9230 |
| | | 14-Aug | Deb.red.fund inve | 8400 |
| | | 24-Oct | cash(income) | 8920 |
| | | 30-Sep | investment in own Deb. | 7000 |
| | | 31-Aug | investment in own Deb. | 5000 |
| | | 31-Dec | P & L Appr | 44,000 |
| | 328,800 | | | 328,800 |
| | | | | |
DR DEBENTURES REDEMPTION FUND INVESTMENT ACCOUNT CR
| Balance b/d | 203,500 | 14-Aug | cash(sale) | 79,600 |
| | | 19-Dec | cash(sale) | 81,000 |
| | | 19-Feb | Deb.red.fund(loss) | 1500 |
| | | | | |
| | | 31-Dec | Balance c/d | 92,400 |
| | 254,500 | | | 254,500 |
1-Jan | Balance b/d | 92400 | | | |
DR 12% DEBENTURE INTEREST ACCOUNT CR
30-Jun | cash | 18,000 | 31-Dec | P & L | 29,000 |
8/31/9/31 | invest.in.own.deb | 2000 | | | |
| invest.in.own.deb | 3000 | | | |
| cash | 6000 | | | |
| | 29,000 | | | 29,000 |
| | | | | |
DR INVESTMENT ON DEBENTURE ACCOUNT CR
31-Aug | cash | 97,000 | 31-Aug | Redeemable deb. | 100,000 |
30-Sep | cash | 96,000 | 31-Aug | Debenture interest | 2000 |
31-Aug | Deb,red,fund(profit) | 5000 | 30-Sep | Redeemable debenture | 100,000 |
30-Sep | Deb,red,fund(profit) | 7000 | Sep-31 | Debenture interest | 3000 |
| | 205,000 | | | 205,000 |
| | | | | |
DR REDEEMABLE DEBENTURES ACCOUNT CR
31-Aug | invest.own.Deb | 100,000 | | Balance b/d | 300,000 |
30-Sep | invest.own.Deb | 100,000 | | | |
31-Dec | Balance c/d | 100,000 | | | |
| | 300,000 | | | 300,000 |
| | | | | |
Interest 30/6: 300,000 x 12 x 6 = 18,000
100 12
31/12: 100,000 x 12 x 6 = 6000
100 12
2. Some years ago Mplc had issued 375,000 of 10% debenture. 2000/2010 at par. The term of the issue allow the company the right to purchase these debentures for collection at or below per with an option to redeem at a premium of 1 percent, on 30 Sept. 2006. The exercise this option the company must give three months notice which it dully did on 30 June 2003 indicating its intention to redeem all the debenture outstanding at 30th Sept. 2006.
MPLC had established a sinking fund designed o accumulate the sum of Tshs. 378750 by 30 September 2006 and had appropriated profits annually and
invested these, together with the interest from such investments and profits made on any realizations from time to time.
A special No. 2 bank account was established specifically to deal with the receipts and payments relating to the debentures and the sinking fund.
By 30 June 2006 annual contributions amounting to Tshs. 1334,485 together with the interest on the sinking fund investment of 39480 had all been invested except for 2475 which remained in the No. 2 account at the date.
The only investment sold, prior to 30th June 2006 had cost 144,915 and realized 147,243. This was used to re purchase debenture with a par value of 150,000.
Transactions accruing between 1 July and 30th Sept. 2006 were:
(i) Interest received on the sinking fund investment
7th July 1,756
13th Sep. 1,455
(ii) Proceeds from the sale of investments:-
2nd Aug. 73,215 (Book value was 69322)
25th Sept. 160,238 (remaining investment)
(iii) Redemption of all debentures on 30th Sept. with the exception of 15,000 held by B. Limited. The company had received notice of a gamishee order.
(iv) MPLC deposited with the W. Bank P/C the sum of 15,150 on 30th Sept. 2006. (You are required to ignore debenture interest and income tax).
Required:-
From the information given above to prepare the ledger accounts (Including the No. 2 bank A/category/0 in the books of MPLC for the period 30th June to 30 Sept. 2006.
Showing the transfer:
Solution
Sinking fund investment | |
Annual contribution | 334485 |
Add; interest | 39480 |
profit on sale of investment | 2328 |
profit o purchases | 2757 |
| 379050 |
less; Debenture purchased | 150,000 |
| 229,050 |
| |
Sinking fund investment | |
Annual contribution | 334485 |
Add; interest(39480 -2475) | 37005 |
| 37490 |
less; investment sold | 144915 |
| 226575 |
| |
Debenture | |
original value | 375,000 |
less; Debenture purchased | 150,000 |
| 225,000 |
| |
DR BANK ACCOUNT CR
Balance b/d | 2475 | W.Bank | 15150 |
interest | 1756 | Deb.redeemable | 212100 |
interest | 1455 | | |
Total inv.sold | 233453 | Balance c/d | 11889 |
| 239,139 | | 239139 |
| | | |
DR SINKING FUND ACCOUNT CR
Prem.on redemption | 2250 | Balance b/d | 229,050 |
| 236,889 | interest on debenture | 1756 |
| | interest | 1455 |
| | profit on sale | 3893 |
| | profit on sale | 2985 |
| 239,139 | | 239,139 |
| | | |
DR SINKING FUND INVESTMENT ACCOUNT CR
Balance b/d | 226575 | sale of investment | 73215 |
profit on sale | 3893 | sale of investment | 160238 |
profit on sale | 2985 | | |
| 233,453 | | 233,453 |
| | | |
DR DEBENTURE ACCOUNT CR
Debenture Redemption | 225,000 | Balance b/d | 225,000 |
| | | |
| 225,000 | | 225,000 |
| | | |
DR DEBENTURE REDEMPTION ACCOUNT CR
Bank | 212100 | 10% Debenture | 225,000 |
Balance c/d | 15150 | Premium on redemption | 2250 |
| 227,250 | | 227,250 |
| | | |
(iii) Annual drawings out of profit:-
In this case, an amount equal to the nominal value of the debenture to be redeemed is debited to the P & L appropriation A/c and credited to the Debenture redemption reserve A/c, the balance of which will be transferred to the capital. Reserve A/c once all the debentures have been redeemed.
Accounting entries:-
(a) Annual appropriation of the nominal value of the debentures redeemed:-
Dr. P & L Appropriation a/c
Cr. Debenture redemption reserve A/c
(b) Director’s approval of the redemption of the debenture (Nominal value):-
Dr. Redeemable debenture A/c
Cr. Debenture redemption A/c
(c) Premium payable on redemption:-
Dr. Share premium and or P&L appropriation
Cr. Debenture redemption A/c
(d) Redemption of the debentures:-
Dr. Debenture redemption A/c
Cr. Cash / Bank A/c
(e) Profit on the redemption:-
Dr. Debenture redemption A/c
Cr. P&L A/c
Example:-
Champwili P&L had issue Tshs. 200,000 8% Redeemable Debentures. Under the terms of issue, redemption was to be effected by equal annual drawings over 10 years on 31st December each year starting 1996.
Eight years offer on 1st Jan. 2004, balance on 8% redeemable Debenture and on debenture redemption reserve accounts were Tshs. 400,000 and Tshs. 160,000 respectively. A further redemption took place in 2004 at 96 and the final redemption in 2005
Open, post and balance the appropriate accounts for the years 2004 and 2005.
EXERCISE
1. Kapirimposhi P&L had issued 500,000 12% Redeemable debentures in 1990 on which interest was paid half yearly on 30th June and 31/12 under the terms of the issue they were to be redeemed by equal annual drawings over 10 years on 31/12 from the year 1996 onwards.
8 years later on 1st Jan. 2004 the balances on debenture redemption reserve and 12% redeemable debentures were Tshs. 400,000 and Tshs. 100,000 respectively. A further redemption was affected in 2004 at 95 ex- int and the final redemption, 2005 at par ex- int – pen, post and balances the appropriate accounts to record the above transactions for each of the years 2004 and 2005.
DR 12% REDEEMABLE DEBENTURE ACCOUNT CR
| | | | | |
31.12.2004 | Deb.Red. | 50,000 | 1.1.2004 | Balance b/d | 100,000 |
31.12.2004 | Balance c/d | 50,000 | | | |
| | 100,000 | | | 100,000 |
| | | | | |
31.12.2005 | Deb.redemption | 50,000 | 1.1.2005 | Balance b/d | 50,000 |
| | 50,000 | | | 50,000 |
| | | | | |
DR DEBENTURE REDEMPTION RESERVE ACCOUNT CR
31.12.2004 | Balance c/d | 450,000 | 1.1.2004 | Balance b/d | 400,000 |
| | | | P & L Appr. | 50,000 |
| | 450,000 | | | 450,000 |
31.12.2005 | Capital reserve | 500,000 | 1.1.2005 | Balance b/d | 450,000 |
| | | 31.12.2005 | P & L Appr. | 50,000 |
| | 500,000 | | | 500,000 |
| | | | | |
DR DEBENTURE REDEMPTION ACCOUNT CR
| | | | | |
31.12.2004 | cash | 47500 | 31.12.2004 | 12% Red.debenture | 50,000 |
31.12.2004 | P & L | 2500 | | | |
| | 50,000 | | | 50,000 |
| | | | | |
31.12.2004 | cash | 50,000 | 1.1.2005 | 12% Deb.red | 50,000 |
| | | | | |
| | 50,000 | | | 50,000 |
| | | | | |
DR DEBENTURE INTEREST ACCOUNT CR
30.06.2004 | cash | 6000 | 31.12.2004 | P & L | 12,000 |
30.06.2004 | cash | 6000 | | | |
| | 12,000 | | | 12,000 |
| | | | | |
1.12.2005 | cash | 3000 | 31.12.2005 | P & L | 6000 |
31.12.2005 | cash | 3000 | | | |
| | 6000 | | | 6000 |
| | | | | |
(iv) Insurance Policy method:-
Instead of investing the sum in securities, the same is paid by way of an Insurance premium to an Insurance company which issues an endorsement policy of the amount equal to the sum payable on redemption and maturing on the date when the debentures become repayable.
The premium paid annually is debited to the debenture redemption fund policy A/c and credited to the cash / Bank A/c, and the premium is paid at the beginning of a period.
The same amount will be set aside out of profit & loss appropriation A/c through debiting profit and loss appropriation A/c and crediting debenture redemption fund A/c.
On the maturity of the policy:-
Dr. Cash / Bank A/c
Cr. Debenture Redemption fund policy A/c ) with sum received on the maturity of the policy and any balance on the Insurance policy A/c shall be taken to the debenture Redemption fund (Deb. Red. Reserve) A/c
If a Cr. Balance – Dr. Deb. Fund policy A/c
Cr. Deb. Red. Fund A/c
If a De. Balance – Dr. Deb. Red. Fund A/c
Cr. Deb. Fund policy A/c
On the redemption of the debentures:-
Dr. Redeemable Debenture A/c / Debenture Redemption
Cr. Cash / Bank A/c
The credit balance on the deb. Redemption Fund A/c shall be transferred to a Reserve A/c.
Entry: Dr. Deb. Redemption Fund A/c
Cr. Reserve A/c
Example:-
A company has a debenture on issue of Tshs. 150,000 on 1st Jan. 1990. It decided to provide for the redemption of the debentures for Tshs. 1,500,000 for 3 years. The annual premium is Tshs. 47,500. Show the necessary ledger accounts to record the above using the Insurance policy method.
DR REDEEMABLE DEBENTURE CR
31.12.90 | Balance c/d | 150,000 | 1.1.90 | cash | 150,000 |
| | | | | |
| | 150,000 | | | 150,000 |
31.12.91 | Blance c/d | 150,000 | 1.1.91 | Balance b/d | 150,000 |
| | | | | |
| | 150,000 | | | 150,000 |
31.12.92 | Deb.red. | 150,000 | 1.1.92 | Balance b/d | 150,000 |
| | | | | |
| | 150,000 | | | 150,000 |
| | | | | |
DR DEBENTURE RED.FUND INSURANCE POLICY ACCOUNT CR
1.1.90 | cash(in.prem) | 47500 | 31.12.90 | Balance c/d | 47500 |
| | | | | |
| | 47,500 | | | 47,500 |
1.1.91 | Balance b/d | 47500 | 31.12.91 | Balance c/d | 95,000 |
| cash(in.prem.) | 47500 | | | |
| | 95,000 | | | 95,000 |
1.1.92 | Balance b/d | 95000 | 31.12.92 | cash | 150,000 |
1.1.92 | cash(in.prem.) | 47500 | | | |
| Deb.Red.fund | 7500 | | | |
| | 150,000 | | | 150,000 |
| | | | | |
DR DEBENTURE REDEMPTION FUND ACCOUNT CR
31.12.90 | Balance c/d | 47,500 | 31.12.90 | P & L | 47500 |
| | 47,500 | | | 47,500 |
31.12.91 | Balance c/d | 95,000 | 1.1.91 | Balance b/d | 47500 |
| | | | P & L Appr. | 47500 |
| | 95000 | | | 95000 |
| | | 1.1.92 | Balance b/d | 95000 |
31.12.92 | Deb.redemption | 150,000 | 31.12.92 | P & L Appr. | 47500 |
| | | 31.12.92 | Deb.red.fund policy | 7500 |
| | 150,000 | | | 15
0,000 |
| | | | | |
DR DEBENTURE REDEMPTION ACCOUNT CR
| cash | 150,000 | 31.12.92 | Redeemable Deb. | 150,000 |
| | | | | |
| | 150,000 | | | 150,000 |
| | | | | |
EXERCISE
1. A Ltd company issued Debentures of Tshs. 600,000 on 1st Jan. 1992 and decided to provide for the redemption by means of an Insurance policy for Tshs. 600,000. The annual premium was Tshs. 190000. Prepare the necessary ledger accounts assuming that the amount of policy was dully released and debentures were paid.
2. The following balances appeared in the books of a limited company on 31st Dec. 1997:-
Dr. Cr.
6% Debentures. Tshs. 500,000
Debentures redemption Insurance policy. Tshs. 460’000
Debenture redemption fund Tshs. 460’000
The policy amount was Tshs. 500,000 and the annual premium were received, and the debentures were redeemed.
-You are required to prepare the necessary ledger accounts in the books of the company.
OUT OF CAPITAL METHOD:-
Example:-
A Ltd co. had a debenture on issue of Tshs. 15000 on 1st Jan. 1990 at a discount of 5%, repayable at par by annual drawings of Tshs. 3000 for five years. Show the necessary ledger accounts for the first year to record the above.
Solution:-
Discount on debenture = 5/100 x 15000 = 750.
DR CASH ACCOUNT CR
| Deb.Appl.&Allot | 14250 | | Deb.,redemption | 3000 |
| | | | | |
| | | | | |
DR DEB.APPLICATION & ALLOTMENT CR
| Redeem Deb. | 15,000 | | Bank | 14250 |
| | | | Disc on issue | 750 |
| | 15,000 | | | 15,000 |
| | | | | |
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