"They were lovey-dovey and playful," a source tells PEOPLE. "They were with the kids, they held hands and laughed and joked as a family. It was not the typical picture of a divorce. If the reports had not come out you would think, 'Wow, they are a perfect couple.' "
It comes as no surprise that in the midst of their separation Paltrow, 41, and Martin, 37, are putting their family first and firmly remaining friends.
The whole family, including their children – Apple, 9, and Moses, 8 – flew to the island of Eleuthera in the Bahamas the day before announcing their separation, in order to avoid any public fallout from the split.
On Sunday, "the kids looked happy," the source went on to say. "Gwyneth was in such good spirits. She had her hair pulled back in a ponytail and she looked amazing."
Martin also made a good impression. "He seemed so engaging and nice," the source says, adding that the musician is easy on the eyes. "He looked like he'd been working out. He's ripped!"
Partygoers were stumped but pleasantly surprised by the duo's appearance together.
"Nobody knew what was going on with the them. It was like a shock," the source says. "It felt like they have a genuine love for each other, to the point where I wouldn't be surprised if a report came out in a couple of weeks that they are back together."