If one of these custom playlists encounters a wendy filtered track what happens

Good question, I don't know. Want to try it and find out, then report back to us?

It seems that these playlists include the stuff I would usually like to exclude from such playlists (audio books, test cds).

Yes, that is a side-effect of grabbing the files from the soup. If you've got any "ignore as child" stuff, you have to hand-delete it from your custom playlist if you've created the list using the steps I outlined above.

Does that mean I did not flag them correctly (flagged the top playlist as "ignore as child." or is this a limitation of either empeg or jemplode?

No, I'm sure you've done everything right. The limitation isn't technically Emplode's or Jemplode's. The limitation is that you can only flag playlists and playlist entries "ignore as child". Since this procedure grabs the files from the soup, then none of those child flags apply.

On my player, it only took me a moment to scroll through and kill the all the stuff that I didn't want in the list.