How should the brakes on a child's bike be adjusted?
With young children is very rare for them to have the hand strength to cause a problem with brake strength. Their hands are small and weak, giving small reach hence low level action in the brake handle. Children bikes are built using cheap components (Even the components on the best children bike rate just above BSO adult bike components) 

The bikes for my boys (now 11 and 7) were always adjusted with both brakes giving maximum possible braking. I would be very surprised if a front brake being too tight would cause a crash, unless it was grabbing and not braking progressively.  

Further - the kind of crash needs to be considered. I would rather my boy went over the handle bars through too much brake force than under a car though not enough.....