"Wir sind im kleinen Garten."
Translation:We are in the small garden.
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Or outside of American English you can write "garden".
Yard itself can be translated into German in different ways:
backyard: der Hof and der Hinterhof
shipyard: die Werft
So don't expect every usage of -yard to be -hof. More examples: http://context.reverso.net/translation/english-german/yard
There should have been an explanation in the adjective lesson, on Strong Weak and Mixed inflections. (Is there going to be one further down on the tree)? Someone who has no prior experience with German, has no idea what you are talking about. And, the Wiki pages do not help, with all the extra stuff in them. No one cares how this came into being from the Old German.
"wie sind in kleinem Garten" is not a translation of the given sentence. It would tranbslate to "we are in small garden", which is correct only in telegram style, both German and English.
The given sentence contains a definite article ("im" = "in dem"). So the correct translation is "We are in the small garden".