I sympathise with your dilemma, but I wouldn't label this little boy a paedo, he was probably copying something else he may have seen (and who knows where, real life, magazine, porn film)? Children do mimic and experiment. I am in no way trying to excuse this or to say your lad shouldn't worry about it, but this may have been along the lines of "you show me yours and I'll show you mine". Your lad has obviously been worried that he has fibbed, but he's now sorted that out - the other boy may have forgotten all about - telling you to go away may just have reflected the way they speak at his home.
If I were you I would try to make very little of it, and to only mention it again if your son wants to talk about it. He didn't take part, after all, you interceded in time - it was a silly unpleasant incident with a young boy knowing far more about sex than he should have at that age. I agree with woofgang - let it go, and discourage the friendship.