I noticed this evening that my 4 months old Yorkie-poo was slightly limping. Her front left leg was visibly bent, and she was favoring it. When she sat up, it was off to the side and further back than her front right leg. When I felt the front legs, the left leg felt different that the right one - as she had dislocated her knee (?) joint. My wife and kids saw it, and agreed it looked wrong/broken/dislocated.

I figured I need to take her to a vet tomorrow.
I put her in her pen to limit her movement.
She took a nap on her pillow for an hour or so.
Now (about 2 hours after noticing the anormaly), it looks OK, and she does not limp or favor the left leg?
What could have happened?
Earlier in the day, one of the neighbor's kids was holding her and dropped her to the ground. Could this be the cause of her injury? Whatever the cause was, how did it get healed or snapped back into place? Is this a sign that she would have a chronic joint issues? Will she suffer from more episodes of dislocated joints?
I noticed this evening that my 4 months old Yorkie-poo was slightly limping. Her front left leg was visibly bent, ... front legs, the left leg felt different that the right one - as she had dislocated her knee (?) joint.

Dogs, like humans, don't have knees in the front limbs. However, she could have dislocated either her elbow or her shoulder.
Yes, being dropped could have caused that, and yes, dislocated joints will sometimes go back into place without vet/doctor attention - you may have inadvertently done so when you examined the leg.
I have put dislocated shoulders back in both a rabbit and a dog by gently moving the leg through the normal range of motion. (Rabbit leaped out of someone's hands, dog slipped on wet steps.)
And yes, a dislocation can lead to problems later on, depending on whether or not the bones were injured and/or how badly the connective tissue got torn/stretched. My dog who dislocated her shoulder at about 9 months developed arthritis in the joint later in life.
You should still take your puppy to the vet and have an X-ray done, to determine whether there is any damage to the bones; your vet should also be able to advise in more depth as to what could have been going on if it wasn't a dislocation.
And you've probably figured this out, but - letting children, especially ones not in your family, handle/carry a small/toy breed puppy is NOT a good idea, IMO. I know of more than one puppy who has broken bones in similar circumstances.
I noticed this evening that my 4 months old Yorkie-poo ... one - as she had dislocated her knee (?) joint.

Dogs, like humans, don't have knees in the front limbs. However, she could have dislocated either her elbow or her ... is NOT a good idea, IMO. I know of more than one puppy who has broken bones in similar circumstances.

I agree.
We told our kids NEVER to let anyone outside of family pick up the dog. Neighborhood kids can pet her only with the dog on the ground.

More to the story.
This morning her left front leg was again out of alignment. Though not pronounced, she had a very slight limp. She ran (at near full speed) outside fine which puzzled me. She was able to make sharp cuts in either direction. However, she limped a bit inside when she was walking slowly. Interesting ...
My wife took her to a vet, and he (highly recommended by friends) examined it (no x-ray) and found no breakage, and took no action. He thinks her legs are just shaped like that.
Until yesterday, her legs were "normal" and symetric. Her front left leg is currently crooked.
By just looking, it appears her should (rather than elbow) is dislocated. If x-ray show dislocation, how would it be fixed?
My wife took her to a vet, and he (highly recommended by friends) examined it (no x-ray) and found no ... just looking, it appears her should (rather than elbow) is dislocated. If x-ray show dislocation, how would it be fixed?

My advice?
Get thee to a better vet, it would be worthwhile to pay the extra bucks for an orthopaedic vet.
Going back to this same vet a couple of times, and not getting ANY help would be more expensive in the long run. Not only so that you can find the problem ASAP, but the ortho vet knows about these specific problems.

Hope you get help for your pup soon,
MaryBeth