I am so sorry and I know the pain of losing a older pet when kids don't really remember life "before". I think your kids are reacting appropriately - the 4 year old is bouncing back, the 7 year old not so much. But he may change in the next few days. Life does go on, but on your own timetable.
I'd say to play the event by ear. I don't think it should be based on what anyone else might think - you don't have to meet anyone else's view of what's "acceptable." If he's not actively mourning, it's perfectly okay to attend. If he seems to be hurting and you feel that distracting him will be worse, then cancel and just have some quiet family time. I think it's important to acknowledge his feelings and let him know that people grieve in different ways, and it changes over time. If you go to the party, that doesn't mean that mourning is over. There may be bouts of sadness (for all of you) over time. In fact, even the remaining dog may be confused after a few days and not know where his litter mate is. You have to be alert for signs of depression and confusion there as well. Your son may also be concerned that this second dog, being the same age, will die as well.
You may find meaning and comfort in some sort of action, observance or memorial activity. We did a garden stepping stone for our dog, in which we all participated.
It's also helpful to get a book or two that help explain death (in line with our own religious or philosophical beliefs) - a good children's librarian can help you find a couple of titles that work for each kid, and even borrow them from larger libraries in the system. Books sometimes help put feelings into words, and serve as conversation starters.
Good luck to you all as you work through the pain.