I occasionally will allow play to continue when either my partner has a ball in his hand or the base coach is holding a ball. A ball anywhere else on the field and the play is dead until the ball is retreived and in my bag.
If a ball enters the field during play... I would likely let the play finish unless the extra ball confused the players or created a safety problem. Then kill it and straighten it out as best I could.
I could see the runner saying "Well, the 1st baseman just threw the ball away. I guess I will walk back to 1st. TAG. Now I would call the runner safe at 1st. This didn't appear to be your situation though and out was likely the best call.
