Native English speakers have told us that you should use in when speaking about islands that are political entities or territories.
PS read more here: http://ell.stackexchange.com/questions/8835/in-at-or-on-an-island
I think you misinterpreted that. Yes, it is "in" when referring to an island as a political entity (though not in all cases, see the comment below), BUT that doesn't mean you can't also refer to that same island in the geographical sense. And in that case, "on" is correct.
In this sentence, both options should be accepted imo.
Furthermore, many people who take this course aren't native English speakers to begin with and punishing them because they don't know this kind of rule that you yourself had to look up (and seems based on a single stack exchange thread with 2 replies), is counter-productive.
We approve both elsewhere so it was just a mistake that on wasn't accepted here too, my previous answer was only about why we use in as the main option. We had on as the main option from the start and we got LOTS of criticism for that, the few comments here now that complain about in are a breeze in comparison. But I'm sure people will hate us whichever one we choose for main.
Ah, ok. I was only commenting on one being accepted and not the other. No real comment on which should be preferred.
Thanks for adding it.
Those native English speakers were wrong. It's not entirely clear when an island is big enough for "in". For example "on the Isle of Man" sounds correct but "in the Isle of Man" doesn't. I'd personally say that "in Åland" is clearly wrong.
My Swedish friend who is a native speaker says that this is not correct since it's an island. The correct way to translate it Han har bott på Åland. If you use in - i then it is in a larger area of land connected to other county but Åland is surrounded solely by water so this needs to be corrected.
Also, my Swedish friend has found a few faults here and there in the translation and we are going to go though them step by step.
I am native Swede, and always use 'på' about islands, even though today, a political entity (countries like Ireland and Iceland) are supposed to have "i". I just can't lose the 'geographical' feeling, which for me comes before the 'political', but in newspaper articles you will mostly find "i Irland" and "i Island" (even though it is hard to pronounce "i" in front of a country name starting in "I"). Wikipedia has an article about this, second paragraph talks about islands, http://sv.wikipedia.org/wiki/I_eller_p%C3%A5
It is på Åland in the Swedish sentence. As for why we've written in Åland in the English version, see my previous comment about this.