Sand and then carefully paint the rusted areas with a rust-resistant paint (like Rustolium). Then get a pack of stickers of something your child likes and stick them all over the frame to cover any weird paint bits. Cover with a clear coat if you want to keep the stickers on there long term, or make sure to buy really good stickers that do not come off easily.
Cover the seat with a simple seat cover or replace the seat entirely. (about $5) Handle bar grips can be removed and replaced, (about $5) although it can be hard to get them off if they are glued on (most are not.) To get them off use an air compressor and stick the edge under the grip all around to loosen, then slide the handles off the end. At the bike shop we frequently used 409 (a degreasing cleaner) to just clean the handle bar covers. White grips dirty very quickly, and never stay clean for long, so if you replace them, choose a different color. Streamers and bells can be added to any bike and are super easy to find and install. If there isn't a hole in the end of the grips right now, just poke one with a nail or other sharp object then push the streamer end into the hole. Baskets are fun too, but keep it very small or they can make steering a little difficult for a new rider.
For safety, make sure there is a rear reflector, but honestly it isn't that important as long as your child isn't riding at night. A good quality helmet is way more important. If your child is riding on the street, a flag is also a good idea if the bike/child is small. You can also get these at a bike store.
The key thing that will make the bike fun to ride is making sure it works well. This will involve cleaning and lubing the chain, as well as lubing the head tube (below the handlebars) if needed and the brake lines (if it has hand brakes) and of course making sure the brakes work well. To clean the chain you remove it from the bike using a chain tool, then soak it in gasoline or chain cleaner, then lube it up and replace it on the bike. If it is fairly clean, just get some chain lube and drip it on there while peddling the bike. If the chain is only a little dirty you can clean it using lube by dripping a lot on, and wiping it up by running the chain through a rag while gently peddling. Use bike lube as it isn't water soluble and therefore will not run off in the rain.
Have fun fixing it up. I'm sure that a small investment of time will result in a bike your child is proud to ride.