The king has a new quest for you.
Pick up the LANCE in the corner of the cupboard. Use yourself to take the lance and use it to poke your squire from the cupboard. Take grandma’s SPELLBOOK from the shelf on the left and use your squire to look at the book. There was a ROCK inside. Use the rock on the family shield in the same inventory to create a spark and light the candle.
Put the candle in the holder on the right next to the cupboard. This will light the corner so you can see your SWORD. Pick it up and let squire carry it. Use squire to select the rusted sword and use it on the chest in the lower left corner.
Use the chest to take the SWORD and ROYAL ROBE out. Walk to the south to visit the king.
Game source: A copy of the game was found here on the internet.