diff --git a/railties/lib/rails_generator/generators/applications/app/template_runner.rb b/railties/lib/rails_generator/generators/applications/app/template_runner.rb
index 73ab57d4f0dd9..3b49b1fa92531 100644
--- a/railties/lib/rails_generator/generators/applications/app/template_runner.rb
+++ b/railties/lib/rails_generator/generators/applications/app/template_runner.rb
@@ -90,7 +90,7 @@ def gem(name, options = {})
       gems_code = "config.gem '#{name}'"
 
       if options.any?
-        opts = options.inject([]) {|result, h| result << [":#{h[0]} => '#{h[1]}'"] }.sort.join(", ")
+        opts = options.inject([]) {|result, h| result << [":#{h[0]} => #{h[1].inspect.gsub('"',"'")}"] }.sort.join(", ")
         gems_code << ", #{opts}"
       end
 
diff --git a/railties/test/generators/rails_template_runner_test.rb b/railties/test/generators/rails_template_runner_test.rb
index 4e1937e0c6943..2da6bd59b5728 100644
--- a/railties/test/generators/rails_template_runner_test.rb
+++ b/railties/test/generators/rails_template_runner_test.rb
@@ -93,6 +93,11 @@ def test_gem_with_env_array_should_put_gem_dependency_in_specified_environments
     assert_generated_file_with_data('config/environments/test.rb', "config.gem 'quietbacktrace'")
   end
 
+  def test_gem_with_lib_option_set_to_false_should_put_gem_dependency_in_enviroment_correctly
+    run_template_method(:gem, 'mislav-will-paginate', :lib => false, :source => 'http://gems.github.com')
+    assert_rails_initializer_includes("config.gem 'mislav-will-paginate', :lib => false, :source => 'http://gems.github.com'")
+  end
+
   def test_environment_should_include_data_in_environment_initializer_block
     load_paths = 'config.load_paths += %w["#{RAILS_ROOT}/app/extras"]'
     run_template_method(:environment, load_paths)