Question #1 is not really asking for an opinion. It is asking that you evaluate the suggestions to see which is the best option. Given your sample story it is clear that the b) option is the correct one since it best summarizes the story. If your kid missed that question, then he/she is indeed missing the ability to evaluate the story. So the test seems to have done a good job corrctly evaluating your child.
Any decent writing curriculum would have taught you that titles should not summarize stories. What was that collection of books called, "a bunch of misfits deliver a ring south", or was it called "The Lord of the Rings" ? Go find a collection of titles, and see if any of them summarize the story they identify. (B) is the worst answer for a title to a story. (C) is actually the most likely title to be chosen for a story. But that still doesn't make any of them right. OP is correct, it is a very bad question.
Question #2 is indeed asking your child to come up with reasonable extensions on the story.
Really? Do you have access to some original form of the test that the rest of us do not? Otherwise, the question is not asking for extensions at all. The most correct answer is probably (A). He didn't change his socks when they got wet, he changed them when he got home. If he hadn't arrived home, he wouldn't have changed his socks. "Why" questions never have only 1 answer.
You should be celebrating a test that has accurately found a weakness in your child’s abilities, and working with your child to better develop these skills.
Well then I have something for you to celebrate too! Here's the good news. There is a common mistake people make. Two people encounter a description. The first sees and ambiguity, and the second does not. The second thinks he's smarter than the first because he is unaware of the ambiguity. The first is actually smarter because he can see the problem.
Guess which one you are, and guess which one the OP's child is? Fortunately, with the sort of parenting that child is getting, I think he'll be fine. On the other hand, you still have celebrating to do.