Translation:In my friend's house, there are three cute dogs.
には is a combination particle. You'll see this with に and で every now and then. The は is added to put some contrast in and show this might be a situation a bit out of the norm. "There are three cute dogs in my friends house" (nuance -> as opposed to them being somewhere else)
I believe that is when the subject is obvious. In this case it could easily be my brother's friend, mother's friend, etc.
But I think it's just giving you an example when the subject wasn't obvious. Like a refresher or something. Make it easier to understand as a whole for the various language levels.
I'm not questioning your understanding, just giving my opinion on the subject. Lol
According to the French Wikipedia, this is indeed due to euphony; here is the list it gives for this particular counter.
Kanji Kana Rōmaji
一匹 いっぴき ippiki
二匹 にひき nihiki
三匹 さんびき sanbiki
四匹 よんひき yonhiki
五匹 ごひき gohiki
六匹 ろっぴき、ろくひき roppiki, rokuhiki
七匹 ななひき nanahiki
八匹 はっぴき、はちひき happiki, hachihiki
九匹 きゅうひき kyūhiki
十匹 じゅっぴき、じっぴき juppiki, jippiki
何匹 なんびき nanbiki
に ni translates to many different things in English and doesn't necessarily mean "in." I'm going to guess that Duolingo probably does accept "At my friends house, there are three cute dogs." In other words, it might be the structure of the English sentence rather than the preposition.
Location に people/animals が ... います translates to "At/in location, there are/is a/the/number people/animals."
people/animals は Location に います translates to "there are a/the/number people/animals at/in the/this/a location ."
You could probably still argue that in English the difference between "At my friend's house, there are three cute dogs," and "There are three cute dogs at my friend's house" is trivial. However, there is a difference in emphasis.
Another issue with your translation might be that friends should be friend's although that might just be a typo in your post and isn't what you typed in the app.