Bu is "this". O is "that."
Şu is something kind of in between, which we don't have in English. Duolingo wants you to translate it as "that" but it's often something like "this one here" or "that one there."
And yes, for that is the small apple you could say Şu, küçük elma." (The comma may be inserted to avoid ambiguity since otherwise it would be hard to distinguish between "that small apple" and "that is the small apple.")
See above AlexinNotTurkey. Su/o kücük bir elma that is a small apple. Su elma kücük That apple is small