National Coal Corporation mines, processes, and sells high-quality bituminous steam coal from mines located in Tennessee and southeastern Kentucky. The company owns the coal mineral rights to approximately 74,600 acres of land and leases the rights to approximately 40,900 additional acres. National Coal has expanded its operations considerably since commencing operations at a single surface mine in Tennessee in July 2003.

Required:
1. Calculate the impact of the depreciation policy change on National Coal’s 2005 net income (loss). Consider the effects of income taxes in your answer.
2. How will the change affect National Coal’s reported earnings over the next few years?
3. How might a financial analyst determine whether the change National Coal made is reasonable in light of industry conditions?
4. How might firms use depreciation policy changes to manage their earnings? Is there anything to prevent rampant use of depreciation policy changes as a tool to manage reported earnings?
5. In light of contracting issues discussed in Chapter 7, speculate as to the possible reasons National Coal made the change in its depreciation policy.