How can we fix/use this room?

Bought new house 1950s split level. How can we fix and utilize this room? We are already removing the old textured paint, priming it white, and adding recessed lights in the ceiling.

This room is off the main entrance and to the left will be laundry room and is the garage entrance. There is a half of a half wall more like a ledge to the right of the front door when you enter. The stairs up lead to the kitchen/dining/livingroom area.

The thought is to make it a playroom for my daughter who is three but don’t necessarily want it to be screaming playroom and chaos as it is the first room when you enter the house.