I have been reading this board for several months now, and have decided that it is time to step in...
First, I agree with yaworski in that this is one of those "boys will be boys" encounters, the older boy just trying to get a rise out of the younger boy. Boys will often use anything remotely sexual (particularly homosexual) for the subject of such comments for the simple reason that they tend to get the most immediate and strongest reaction. Just as acco40 said, the boys of this generation call each other "gay" as an insult, not as a proposition. From what I got out of the situation,