"They are good friends."
Translation:Ili estas bonaj amikoj.
Given that we know the friends are plural, but we don't know their gender, would it be acceptable (and potentially more correct) to say "Iliaj estas bonaj geamikoj"?
It should be acceptable ( and if not accepted report it) although as I understand it these days amikoj is most usually accepted to be either gender while geamikoj emphasises that fact / explicitly states they are of multiple genders
No. Ge- does NOT mean "of unknown gender". It means "of mixed gender / of both genders."
So - "geamikoj" is explicitly a mixed group of friends (including both male and female friends.)
Definitely not iliaj though; that would mean "theirs are good friends", which in itself is a fine sentence, but does not match this exercise.