We need to see the entire room. Please post pictures of the other walls. First, you need a wider TV console

Yes, arrangement looks much better!! If you are anxious to paint, you could roll out the Natural Wicker, as you are going to need a primer anyway over that deep paint. Won't hurt to use is as basically a primer. I can't really recommend a paint until you are finished with the room. Your next step will be chairs, lamps, end tables, lamps (I would get a nesting coffee table or oval), art and drapes (which are too short).

Thank you for being clear about what has to stay, so I'm going to deal with your "givens," the built-ins and sofas. --Is the current carpet in good shape and comfy for the kids? Of so, get it cleaned and leave it. It harmonizes with the fireplace, and kids live on the floor. You can get hardwoods when they're older. --Choose a much lighter and warm cream/taupe wall paint that goes with the carpeting and stone. Sorry, honey. That will NOT be gray. Other Commentors will make some good paint suggestions, taking into account that you have a lot of outdoor greenery that affects paint choices In good natural light, take a close up of the carpeting if you decide to keep it. If you need curtains for privacy or to dim room, match them to the paint color--ceiling to floor length. Also need to take into consideration the kitchen area wall color. Can you show us that? (Always show all walls of an open space when asking a Design Dilemma.) --Rethink layout to create TV conversational zone and a kid zone. TV/Conversational zone: Move wider sofa to face the fireplace and the smaller sofa to face the great outdoors! It looks like nature is right there, so it's an extension of your living room. Don't block the great view! Move the smaller sofa against the wall so it creates an "L" with the wider sofa. Put a large, colorful, circular storage ottoman in the "L" or two colorful smaller storage ottomans. Some of the spillover of toys and such can go in there. Put tray(s) on top of ottomans when entertaining. The one below is kind of fancy, but there are lots of storage ottoman options out there. --TV conversational zone.:Move TV to one of the built-ins since those are one of your givens. I'm going to say something sacrilegeous: Get a TV that fits in one of the built-ins. --Kid zone. This will be a play area between the kitchen and the TV/conversational part of the space. Get open wood shelving, sofa height if possibl to go against long sofa. Get baskets for the kids' toys. The finish should be the same as your wood trim. You're sure to find bookshelves like that on Craigslist. Down the road, when kids are older, you can get a lovely sofa console cabinet to use as a buffet. Lighting: Proportions will be important. Something in a wood finish but with modern lines would be great. Here's an article on measurements for different sized rooms, tall ceilings, etc https://www.lumens.com/how-tos-and-advice/how-to-choose-the-right-size-ceiling-light.html.

@Ying Wang - Hello! My reaction to this new arrangement is that it gives a feeling of comfort & coziness to the space. I do love those white chairs. The Star - absolutely must stay put if it brings pleasure to your child. It is not out of place - I was just curious about what it was. A light! Must be pretty at night when the room is in dim light. The triptych of Summer Palace in Bejing is pretty. Do you have a smaller wall space to hang it where it can be viewed up close? The posters are intriguing as I do love vintage and antiques. You mention they are all framed with dark frames so I’m imagining they’d create a very interesting gallery wall that would add much interest to the large open space on the wall and, if they have pops of color such as the one you show, a grouping of them would add energy to this space during day time with the natural light coming through the sliding door. Think about removing the Palace picture & arranging the posters (how many are there?) on the open wall space & hang them both higher & lower than the Palace picture is. To create a mock up & avoid damaging wall with holes, I like to cut paper the size of the art & tape paper to wall in various tryout arrangements. I lay the art out on the floor first then copy that arrangement with paper taped to wall. If you have an even number & they’re all the same size, a symmetrical arrangement would be good. If not the same size, be creative & try to use the same spacing between edges of frames. Also pay attention to the images - when viewing sometimes a piece just looks better in a higher or lower position in the overall arrangement. Have fun with it if you do that!