I found the solution, and I am sharing it here to help anyone who might face this scenario in the future.
You do not need to create a deployable package or move the code to a Tier-2 environment just to test the Data Entity logic. You can test the CRUD operations (Create, Read, Update, Delete) directly in your Local Dev VM (Tier 1) using the Excel Add-in. Since Excel uses the same OData protocol as Power Apps, if it works in Excel, it will work in Power Apps.
Here are the detailed steps:
1. Prerequisites:
Make sure to Build your project.
Perform a Database Synchronization (Crucial for the entity to appear).
2. One-Time Setup (Fixing the missing "Design" button):
To ensure the Excel Add-in works correctly:
Go to D365FO: System administration > Setup > Office app parameters.
Click on Initialize app parameters.
Confirm the action.
3. Configure Excel:
Open Excel (inside the VM or locally if connected).
Insert the Microsoft Dynamics Office Add-in via Insert > My Add-ins.
In the Add-in settings (Gear icon), set the Server URL to your local environment URL (e.g., https://usnconeboxax1aos.cloud.onebox.microsoft.com).
Note: Remove the trailing slash "/" at the end of the URL.
4. Test the Entity:
Click Design > Add Table.
Search for your Entity name (Public Collection Name) and add the required fields.
To Test Read (GET): Click Refresh. The data should populate from D365.
To Test Create (POST): Add a new row in Excel and click Publish. If it returns "Publish Successful", your entity logic and validations are working perfectly.
