Here's what I'd do:

1. Wallpaper the wall behind the "fireplace" with this paper:

2. Wall mount the TV. Eliminate the fireplace and replace it with a long, low media console, like this:

3. Paint remaining walls in the room either the light color of the background of the wallpaper (color match at paint store) or the dark color of the motif of the wallpaper (color matched again), depending on preference.

4. Replace the wall sconces with these:

5. Have roman shades made in this fabric (with a contrasting band of reddish/orange trim):

6. Add two swivelling chairs to facilitate TV watching or conversation. A side table between them (check out Jax from Room and Board) would be a great place to add a table lamp. I love these chairs - super comfy in a happy, punchy color:

And, finally...

7. A coffee table like this one, which references the woodcut pattern in the wallpaper:

If the children got hurt on a sharp corner be sure to buy a round coffee table or a soft ottoman.

anniebird, recommending a wool durrie when the OP has already indicated they have a dog is in-explainable.

Wallpaper on large walls can be perilous because the roller repeat is always quite pronounced.

I think you mean inexplicable;)

I thought maybe I'd missed something - perhaps a dhurrie in a home with pets is a well known no-no? But this seems to be personal preference:

http://ths.gardenweb.com/discussions/2528924/flat-weave-wool-cotton-kilim-dhurrie-and-shag-rugs-questions

I do agree, however, that the scale of the wallpaper is too small for the large wall. The Hygge&West website shows a slightly better representation, but Beverly makes a good point.

I also agree with her advice to relocate the fireplace - it's dwarfed by the wall. I think a long, low console would be a much better focal point for that wall. I think your room will look more thoughtfully designed if you stick to one focal point (the wall with the TV). Good luck! :)

Maybe place the traditional fireplace in the bedroom in a room better suited for its petite size.

Another carpet idea for you: flor tiles - replaceable if there are spills: