According to Gamefaqs, and my own experience when I tried the CES challenge, Terra's scene occurs b/c you didn't recruit her. The only time I didn't recruit her is when I did the CES challenge, so I don't know if it still occurs if you recruited someone else, too. No, she doesn't join you; she just arrives so there doesn't have to be two endings. Part of what makes the CES challenge hard is you just have the three characters fight Kefka.

I also learned on Gamefaqs and from completing the CES challenge that whenever you fail to recruit someone, they give you a menu portrait of the character while the camera slides over an area, which is a hint to where you can pick them up. Also, depending on certain combinations, some endings are altered. For example, if you have Celes but didn't pick up Locke, the ending is altered, which is logical b/c Locke can't save Celes. Don't worry; I can't remember what happened b/c I've only seen it once a few months ago, but she doesn't die.