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Question: 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:
January 1, 2016
CDN$1.00 = USD $0.87
December 31, 2016
CDN$1.00 = USD $0.855
December 31, 2017
CDN$1.00 = USD $0.835
December 31, 2018
CDN$1.00 = USD $0.82
December 31, 2019
CDN$1.00 = USD $0.89
Average for 2016
CDN$1.00 = USD $0.867
Average for 2017
CDN$1.00 = USD $0.849
Required:
A) What is the amount of interest paid (in Canadian Dollars) during 2016?
B) What is the amount of foreign exchange gain or loss recognized on the 2017 Income Statement as a result of revaluing the loan payable?
C) 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?
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