I would assume that they were interested in minimizing their loss by chopping the car. There's a market for used car parts, including panels. Also, sometimes a dealer will take the mechanicals from a car that has body damage and insert them into a car that has a decent body but lousy mechanicals, thereby getting a decent car out of two junkers. But if you want to know what they're thinking, you would need to ask them.

Given that you bought the car as-is, and are returning it with significant body damage and a non-functional engine, it sounds like you're lucky the dealership is offering you anything. The difference between the price they're offering and the purchase price is about $3,500 - after the body damage, that's about $1,000. For six months of driving and depreciation, the mechanical failure aside, $1,000 isn't that much money. It isn't their fault the car was damaged. There's also a good chance that the reason the car is so severely damaged is that your daughter neglected an oil leak, and possibly continued to drive the car even after the "add oil" light came on (think of that light as meaning, "pull over ASAP and stop your car to avoid destroying the engine.")