If it were mine I would take it down to the frameset, wash and wax the frame, probably using something like Mother's ScratchX on it (careful on decals). Use something like oxalic acid (or Barkeeps friend power mixed into a paste) on the rust (steel parts only, not aluminum!), then coat with wax or something to protect. Then clean all the parts/bearings, regrease and reassemble.

Looks like a nice bike! +1 on giving your friend a nice bottle of something, and I hope you enjoy the bike!