As others have stated, the group had fun so I don't see a problem. However in my game ...
Yeah. Kind of. The dragon was hidden in the shadows, waiting for the party to come into its lair. They were walking through a tunnel, and the dragon was there, slinked up in position to hit them with its 30' line breath weapon. The druid got an EXCEPTIONAL perception roll, called everyone's attention to it.
The druid noticing the dragon would have been the start of initiative with everyone but the dragon and the druid surprised and unable to act on the first round. I think this is the biggest difference - this situation is a great example of a surprise attack.
In addition, there's no reason the dragon couldn't have been high enough that it couldn't be easily reached. It has a climb speed so it could easily have been clinging to the ceiling , which could have been super creepy as well.
The dragon then got something like a 4 for Initiative - and was effectively dead within a full turn. We're talking a creature with an 18 AC, 130 HP with resistance to almost all damage completely and utterly ruined by a party of 5th level characters.
It was a farce.
Well, I DID let their plan work.
But I don't want this to become the norm - because I've been there as a teenager, and this is when half the players leave the hobby. "All we did was stick stuff up the butts of dragons."
The folding boat thing ... just no. I'm sorry, I know there's a lot of people that do the "rule of cool" but I would have just said no to the folding boat suppository. Even if they did somehow manage it (I have no clue how they would do it physically) the expanding boat would have made the dragon temporarily uncomfortable, may have even done some minor damage. It would not have incapacitated it.
Some other questions - was the cavern well lit or dim light? The shadow dragon has "
Living Shadow. While in dim light or darkness, the dragon has resistance to damage that isn’t force, psychic, or radiant."
I would have given the dragon a lot of room to move (actually I would have beefed up the dragon or given it allies and/or traps that it could trigger) while also using the environment to it's benefit. It can hide as a bonus action in dim light, it should have been in a large cavern starting out of range of direct attack and then moved around attacking from multiple directions every round, hiding after it's attack. This should be sneaky SOB that does everything it can to avoid direct confrontation.
It also sounds like you just had some massively bad rolls on top of it all. In addition to the bad initiative, the dire wolves are a +3 to grapple, the dragon is +6 so the odds of the dire wolves grappling it were slim. Given everything else though, I'm not sure this would have been that tough of a fight. A bit swingier than the calculations would indicate but by my calculations 7 5th level PCs vs a CR 10 monster is a medium challenge fight, which people are often going win easily. Which they did.