What is the acceptable distance between the apple watch and iPhone?

That is a scenario with multiple variables. The bluetooth range is around 25 feet (7.5 meters), but this could be shorter depending on interference, walls, cordless phones, etc. The range of communication can also be extended if you have WiFi as the watch and iPhone can use the Wifi instead of bluetooth on private networks such as your home.

From this article, I believe you would find a Bluetooth range for an iPhone and Apple Watch to be at least 33 feet (10 meters).

http://www.sans.edu/research/security-laboratory/article/bluetooth