Cook bacon in a Dutch oven over medium heat until crisp. Remove bacon from skillet; crumble and set aside. Add mushrooms and shallots to bacon drippings in pan; saute 5 minutes or until the mushrooms are soft. Remove from pan; set aside.
Add potato and broth to pan; bring to a boil. Cover, reduce heat, and simmer 12 minutes or until potato is very tender. Transfer potato mixture to a food processor; process until smooth. Return to pan. Add milk, mushroom mixture, sherry, salt, and pepper; cook over low heat 10 minutes or until thoroughly heated. Ladle soup into bowls; top with crumbled bacon.