Yes, it literally translates to toys, but it is also a combination of "speel" which literally translates to "play" and "goed" which translates to either "goods"

Yes, it literally translates to toys, but it is also a combination of "speel" which literally translates to "play" and "goed" which translates to either "goods" (most likely candidate here as origin for the combination that means "toys") or "good" (as in, well). IOW, the parent is correct that "speelgoed" pretty much means "goods to play with". I have no knowledge about the Danish leg godt story, though. Source: Native Dutch speaker