GTJE65, I agree, a child of 7 is old enough to know when they're lying. But punishment should be appropriate to the age. My 2 year old grandson has 2 minutes in time out, has to give mum or whoever is putting him in timeout an apology and a hug.
A 7 year old could do a half an hour in time out (reading or doing something non technology based) and then apologise.
Cancelling a whole day because of a lie for a 7 year old is disproportionate. However, the OP has said the parents are still working. So it is entirely possible they are front line workers and therefore their patience may well be thin.
While I disagree with the punishment, I agree that the parents are in charge of decisions about it.