I understand the whole touchstone approach, but I agree with the OP's original choice here. He was DMing for his son and friends who were essentially dressing up a dog and dragging it around on a leash as a prize. Very uncomfortable, no matter their fondness for the creature. He chose to remove it from the game.
D&D is a reflection of life as much as you want to make it, or as much as an escape as you want it to be. I've had my stepson ask me why the race of black people were evil? Why the "jock looking and macho talking dwarves" picked on the "effeminate and nerdy elves"? And this was just from him reading the PHB. Kids pick up on stereotypes quickly, its an easy way for them to compartmentalize information. I make sure in my games with kids to never delve lightly into morally questionable behaviors, like stock racism, or slavery. And like the OP... if i felt things getting awkward, out goes the culprit.
I guess, I mean is s fantasy role playing game. Part of growing up is learning to differentiate between real life and fantasy. Even at a young age. But if that's the way you want to run your games I'm not gonna stop you. But this DM is recognizing that their kids really got attached to this npc, why not make it a fun game getting it back. By reinforcing they could never get to know this npc is basically othering it. Instead of getting acquainted with something new.