It does say "remaining quarter" which is definitely meant to be a quarter of what's left. With word problems, you generally follow the order the statements are made. So your first assumption is correct.
16-4=12
Rachel is left with twelve bars, which we need for the next part of the statement.
12/4=3
Tracey asks for a "remaining quarter" and thus takes three.
4+3=7
Tracey now has 7 bars.
It's just a terribly phrased sentence. Appropriately worded and still coded correctly, it should say something like:
Rachel has sixteen chocolate bars. Tracey takes four from her and then asks for a quarter of what remains.
