It seems to test individual 1-bit DRAMs in the video RAM check, so it only works for a SG-1000 and not the SG-1000 II which has two 4-bit DRAMs in place of eight 1-bit ones. [...] Well I mean, the test works but the IC numbers are wrong for a SG-1000 II. :D
The "extension port" check sets PPI port A,B to inputs and both nibbles of port C to outputs, then verifies it can read and write the port C output latch. It's not much of a test, but it would verify if the PPI was malfunctioning. It isn't safe to test the output latch of ports A and B if a peripheral was plugged in, so only port C is checked.
I actually don't know how the SG-1000 uses port C which is for the SC-3000 only. Does the SG-1000 have an expansion port (err, "extension port") that port C goes to?
It will fail on a SMS or Mark III as those systems have no PPI, meaning there are no registers at port $DE and $DF. So it says "BAD" instead of "OK", but it really means "Not present".
I think it will work properly on a SC-3000/SC-3000 II too.
That's all I looked at though. I didn't actually run it in an emu or on any hardware though.