If you don't want the trouble and expense of removing it, just paint over it so it fades into the background. Paneling like that can look pretty ok with a couple coats of paint (esp for a lake house). You can fill the lines or not. I would paint the beams to match the ceiling and call it good.

I think your plan would be a lot of work for it to just end up looking like typical grey paneling, not much different than how it already looks. I'd paint it.

I would paint out the walls white and do your idea for the ceiling. There's not very much paneling out there that can be embellished and look good. Save the trouble and paint it white.

Is that even wood? It's not attractive and I wouldn't re-use it.

Is the top pic your house and the bottom pic what you like? If so, that's too too much visually for a living room. Like it would exhaust me to sit there :)

Is the paneling real, thick wood? Or the cheap stuff?

I see the fireplace is maybe 60's, but the previous owners may have tried to cosy up the place since it's by a lake. You may need to undo a lot....

Anyway, besides the point. I imagine that in a vacation home, simple and calm is best.

Good luck and congrats!

I think paint the paneling. Don't add crown. Change the thin molding to match that on the other wall. Paint ceiling and beams and molding white.