I need help on a project I'm right in the middle of?

I have an older home 1955 maybe. The project that I am involved in right now is surfacing a wall in preparation for new paint. While removing the layers of paint and wall paper and paint and wall paper and more wall paper, yes, that's what they did painted over 3 layers of wall paper....Some of the drywall was damaged so I thought that maybe joint compound would fix it up just fine. It looks as if the compound is seeping into the layers of damaged ripped drywall and now beginning to bubble a bit. Will this dry up over time or have I used the wrong thing to repair the drywall? What should I do to repair damaged drywall without buying new drywall? Is there a product specifically for this?