Hi Mr/Miss/Mdm,
You do have a very cramped living room but however its still possible to have a comfortable living area.
Both ideas work but the 1st one has the potential to make the space bigger.
Adopt the 1st idea and choose your furnitures, like sofa and side tables wisely.
Choose those low and smaller configuration. Sofa max 1200 will do.
If your furnitures is small in size, it will visually allow the space to look bigger.
If any doubts, email me at ***@yahoo.com.sg
Cheers