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Is it correct to say " when I approached the light I (discovered?) it was only fireworks"; or should I say "they were fireworks" or "it was a firework"?
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Since you're talking of the light, it's ok to use "it".

"When I approached the light, I realized/found out it was only fireworks/a firework"
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I think "fireworks" is better here -- fireworks are very rarely referred to in the singular.
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Comments  
When I approached the light, I discovered it was only fireworks.

Perfect. I wouldn't change anything.
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