My LO sees her daughter (who's not there) and asks "where is she and how did she leave"? How do I answer her?

I have a book recommend. While it is fiction, the woman volunteered for years in memory care. Her view is similar to Oliver Sacks, who studied the brain his entire life, and that is that those with Dementia DO HAVE A WORLD; it is just a world we cannot know or enter, that we struggle with.
The book is Still Time by Jean . As it is not new it is CHEAP on Amazon, likely only a dollar or two. You will in this book enter the world of a professor put into care for his advancing Alzheimer's. The book is told from his perspective.
The worst thing you can do FOR YOURSELF if to argue with the mind suffering dementia. You can't argue with a perspective of this world you cannot understand, and it's impossible to convince them their world is wrong. They will thereby become so much more anxious and so much more determined and you will become so much more miserable.
When she says "There's Alma," just respond with calmness "Oh? I thought she was gone". If she says "Where's Alma?" say "Oh I am sure she will show up. You know her." Keep it calm. Learn all you can about this disease and watch some of those videos Barb mentions.
I didn't see your original post, so I am glad you repeated. I wish you the best of luck.

Garlic, have you Googled Teepa Snow? She has some great videos on entering the reality of our dementia Loved Ones.

As hard as it is not to correct, I would go with the flow when she says you are a friend.