The rust is easy to take care of. Remove the rusted nuts and bolts and take them to a
hardware store and get stainless-steel replacements. For the rest of the rust on the bike itself, get some TurtleWax Chrome Polish and it'll take the rust off. Really stubborn thick rust can be removed with naval jelly. Then wax over that area to protect from the elements. If this bike will be outdoors, you can spray the bare metal spots with a spray-can of clear polyurethane finish. There's a particular can at
hardware stores that's designed for protecting decorative bare metal like brass and copper garden pots.
The clunk is probably the pedal or bottom-bracket bearings. Spin the pedals by hand and wiggle them to see how much freeplay there is. You can take apart the pedals, clean and re-grease the bearings. Put it all back together and adjust the bearing-cone to give smooth operation.
The bottom bracket is most likely a normal cotterless-crank design. It too, can be disassembled, the bearings and bearing-cups can be replaced with new ones. Use loose bearings instead of the retainers and you can squeeze in 2 more balls for smoother operation. Grease everything up, install and adjust to give smooth operation without any freeplay.
So you're looking about about 1-3 hours worth of work max. If you can't do it yourself, most bike shops can do that work pretty easily.
