Very cute! I made one similar to this. Your two year old will love it!
No advice about the quilting. I've never used disappearing thread, either. If the back is dark, I'd probably choose a thread that matches closely and if you actually stitch in the ditch (and not 1/4 inch away from the ditch) it probably won't show on the front. Of course, you could use different colored thread on top and bottom.