This is not only a Danish tradition but also a German one (and probably other European countries). In some parts of Germany children (and adults, too) disguise (for example as angel, pirate, clown and so on) and celebrate carnival like this.
"On" is also marked wrong. Is anyone from Duolingo looking at the errors anymore? I have reported on this question a few times and it still maks it wrong, as is the case with a few other questions. Months go by with no corrections.
Absolutely, really clumsy, better English would be "all the children are wearing fun clothes for Shrove Tuesday." Funny to be expressed in danish would be better as underligt in the sense of strange or weird. Sjovt is definitely more fun than peculiar.