In Nancy Drew: Sea of Darkness, Nancy discovers some letters between Magnus and Dagny. In them Magnus asks about the specialty dog toy. The tiny key is located in the dog carrier on the ship.
The exact location is in the captain’s quarters. The carrier is the basket looking case with the teal pillow in it on the floor in the corner by the picture of Magnus and Tumi. Lift up the pillow to find the tiny key.
Once you have confronted Elisabet about the closet behind where she sits, and open it, you can then look inside and find the rawhide bone. Use the tiny key to unlock and open the doggie toy and find more notes from Magnus, this time about the ice caves.
