By what amount (in Canadian Dollars) would XYZ have to adjust its Loan Liability on December 31, 2016 as a result of the year's foreign exchange rate fluctuations?
XYZ Corp. has a calendar year end. On January 1, 2016, the company borrowed $5,000,000 U.S. dollars from an American Bank. The loan is to be repaid on December 31, 2019 and requires interest at 5% to be paid every December 31. The loan and applicable interest are both to be repaid in U.S. dollars. XYZ does not hedge to minimize its foreign exchange risk.
The following exchange rates were in effect throughout the term of the loan:
The average rates in effect for 2016 and 2017 were as follows:
A) A $5,000 increase.
B) Nil.
C) A $5,000 decrease.
D) A $2,500 decrease
C) A $5,000 decrease.
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