I created a new account and logged into GNOME on Wayland and now GNOME
Terminal looked and behaved correctly and did not have the ugly drop
shadow issue.

After using dconf-editor to recursively reset the configuration for
/org/gnome/terminal/ this issue disappeared for me on my normal user
account too. :)

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You received this bug notification because you are a member of Desktop
Packages, which is subscribed to gnome-terminal in Ubuntu.
https://bugs.launchpad.net/bugs/1612416

Title:
  Ugly shadow under Wayland

Status in gnome-terminal package in Ubuntu:
  Confirmed

Bug description:
  The window shadow looks good under X.Org Server, but under Wayland it
  is buggy and looks big and ugly and white.

  Other applications such as gnome-calculator, gedit, etc looks fine in
  Wayland.

  ProblemType: Bug
  DistroRelease: Ubuntu 16.10
  Package: gnome-terminal 3.20.2-1ubuntu2
  ProcVersionSignature: Ubuntu 4.4.0-34.53-generic 4.4.15
  Uname: Linux 4.4.0-34-generic x86_64
  ApportVersion: 2.20.3-0ubuntu5
  Architecture: amd64
  CurrentDesktop: GNOME-Classic:GNOME
  Date: Thu Aug 11 22:33:36 2016
  InstallationDate: Installed on 2013-12-26 (958 days ago)
  InstallationMedia: Ubuntu 13.10 "Saucy Salamander" - Release amd64 
(20131016.1)
  SourcePackage: gnome-terminal
  UpgradeStatus: No upgrade log present (probably fresh install)

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