The bolded part is really poorly phrased. Paul's second shot in round one crossed the island and went OB out the back. So he played last place in bounds, which is what the second sentence tells you to do. However, the third sentence tells you something completely different. This is a total cluster. I wish this would have been caught sooner, and I hope it doesn't end up costing paul 2 strokes, as it seems like had an honest interpretation of the caddy book.
Yeah, you're right - typically with island holes there's a defined drop zone, and in this case the wording was quite confusing indeed.