I believe it should be "on the tree", let's have a look into the dictionary http://www.lingvo-online.ru/en/Translate/ru-en/%D0%BD%D0%B0%20%D0%B4%D0%B5%D1%80%D0%B5%D0%B2%D0%B5 на = (сверху, на поверхности) on
For my opinion, in Russian its enough simple. Use "на=on" any time when something on something, on surface of something, no matter is it on top or in the middle or in the begining of something. For example: The cat is on the trunk of the tree. The cat is on a branch in the middle of a tree. The cat is on the top of the tree. In all these cases Russians use "на". Why in English it - in the tree, I don't understand. For Russian in=в, so "in the tree" means "inside the tree". Google translates "кошка находится на дереве" - "the cat is on the tree".
In addition to what's already been said... and to make things even more fun, 'на' also means "on" as in literally on top of something. For example "on the table" = "на столе".
The rules are rarely simple and there are many exceptions. The way I figured this one out was that well, the cat's not inside ('в') the tree so I guess it's the other option.
English uses different prepositions when something is:
in the middle of a tree (on a leaf or on a branch): in. Examples: The monkeys are in the tree. The cat is in the tree.
on the top of a tree: on. Example: The bird landed on the (top of the) tree. The boy sat on the (top of the) tree after climbing it.
inside the tree (in a hole of the tree or inside its components): in. There is gold hidden in that tree. Rubber is made from milky latex in the rubber tree.
It's explained in the tips & notes to the lesson (prepositional case).
It seems like when "there is" is involved, you somehow have to work есть into the sentence: google translate suggests
в дереве есть кошка
for your sentence.
I have seen this есть = "there is" elsewhere on numerous occasions, e.g. «тарелка на столе/на столе есть тарелка»
"A/the plate is on the table/there is a plate on the table"
In English, "in a tree" means "on a branch of a tree, below its top" and "on a tree" means "on the top of a tree". The Russian sentence probably refers to the former and that's why "in" is used in the main translation and "on" is rejected.
By the way, this had already been mentioned in previous comments.