diff --git a/lib/active_record/connection_adapters/sqlserver/database_statements.rb b/lib/active_record/connection_adapters/sqlserver/database_statements.rb
index 6185e5f1d..c5ebb342d 100644
--- a/lib/active_record/connection_adapters/sqlserver/database_statements.rb
+++ b/lib/active_record/connection_adapters/sqlserver/database_statements.rb
@@ -278,8 +278,12 @@ def drop_database(database)
           end
         end
 
-        def create_database(database)
-          do_execute "CREATE DATABASE #{quote_table_name(database)}"
+        def create_database(database, collation=@connection_options[:collation])
+          if collation
+            do_execute "CREATE DATABASE #{quote_table_name(database)} COLLATE #{collation}"
+          else
+            do_execute "CREATE DATABASE #{quote_table_name(database)}"
+          end
         end
 
         def current_database
diff --git a/test/cases/database_statements_test_sqlserver.rb b/test/cases/database_statements_test_sqlserver.rb
new file mode 100644
index 000000000..3928b6c00
--- /dev/null
+++ b/test/cases/database_statements_test_sqlserver.rb
@@ -0,0 +1,48 @@
+require 'cases/sqlserver_helper'
+ 
+class DatabaseStatementsTestSqlserver < ActiveRecord::TestCase
+ 
+  self.use_transactional_fixtures = false
+ 
+  setup do
+    @connection = ActiveRecord::Base.connection
+  end
+ 
+  should 'create database' do
+    @connection.create_database 'activerecord_unittest3' #, 'SQL_Latin1_General_CP1_CI_AS'
+    database_name = @connection.select_value "SELECT name FROM master.dbo.sysdatabases WHERE name = 'activerecord_unittest3'"
+    assert_equal 'activerecord_unittest3', database_name
+  end
+ 
+  should 'drop database' do
+    @connection.drop_database 'activerecord_unittest3'
+    database_name = @connection.select_value "SELECT name FROM master.dbo.sysdatabases WHERE name = 'activerecord_unittest3'"
+    assert_equal nil, database_name
+  end
+ 
+  context 'with collation' do
+    teardown do
+      @connection.drop_database 'activerecord_unittest3'
+    end
+ 
+    should 'create database with default collation for the server' do
+      @connection.create_database 'activerecord_unittest3'
+      default_collation = @connection.select_value "SELECT SERVERPROPERTY('Collation')"
+      database_collation = @connection.select_value "SELECT DATABASEPROPERTYEX('activerecord_unittest3', 'Collation') SQLCollation"
+      assert_equal default_collation, database_collation
+    end
+ 
+    should 'create database with collation set by the method' do
+      @connection.create_database 'activerecord_unittest3', 'SQL_Latin1_General_CP1_CI_AS'
+      collation = @connection.select_value "SELECT DATABASEPROPERTYEX('activerecord_unittest3', 'Collation') SQLCollation"
+      assert_equal 'SQL_Latin1_General_CP1_CI_AS', collation
+    end
+ 
+    should 'create database with collation set by the config' do
+      @connection.instance_variable_get(:@connection_options)[:collation] = 'SQL_Latin1_General_CP1_CI_AS'
+      @connection.create_database 'activerecord_unittest3'
+      collation = @connection.select_value "SELECT DATABASEPROPERTYEX('activerecord_unittest3', 'Collation') SQLCollation"
+      assert_equal 'SQL_Latin1_General_CP1_CI_AS', collation
+    end
+  end
+end
diff --git a/test/config.yml b/test/config.yml
index 553903d79..bd20e22f6 100644
--- a/test/config.yml
+++ b/test/config.yml
@@ -9,6 +9,7 @@ default_connection_info: &default_connection_info
   username: <%= ENV['ACTIVERECORD_UNITTEST_USER'] || 'rails' %>
   password: <%= ENV['ACTIVERECORD_UNITTEST_PASS'] || '' %>
   azure: <%= !ENV['ACTIVERECORD_UNITTEST_AZURE'].nil? %>
+  collation: <%= ENV['ACTIVERECORD_UNITTEST_COLLATION'] || nil %>
 
 connections: